UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
For the transition period fromto
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
COMMISSION FILE NO.: 0-26640
SCP POOL CORPORATION
(Exact name of registrantRegistrant as specified in its charter)
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DELAWARE36-3943363
| Delaware | 36-3943363 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 109 Northpark Boulevard, Covington, Louisiana | 70433-5001 | |
| (Address of principal executive offices) | (Zip Code) | |
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
109 Northpark Boulevard, Covington, Louisiana 70433-5001
(Address of principal executive offices) (Zip Code)
985-892-5521
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act:Common Stock, par value $0.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ¨ NO x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES xX NO __¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filerx Accelerated filer¨ Non-accelerated filer¨
Indicate by check mark whether the registrant is an accelerated filera shell company (as defined in Rule 12b-2 of the Act). YES X¨ NO __x
The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant based on the closing sales price of the Registrant’s common stock as of June 30, 20042005 was approximately $1,561,160,985.$1,787,577,939.
As of February 14, 2005,17, 2006, the Registrant had 52,338,19552,606,950 shares of common stock outstanding.
Documents Incorporated by Reference
Portions of the Registrant’s Proxy Statement to be mailed to stockholders on or about March 28, 200527, 2006 for the
Annual Meeting to be held on May 10, 2005,9, 2006, are incorporated by reference in Part III.III of this Form 10-K.
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SCP POOL CORPORATION
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General
Based on industry data, SCP Pool Corporation (theCompany, which may be referred to asPOOL,we,usorour) is the world’s largest wholesale distributor of swimming pool supplies, equipment and related leisure products. The Company was incorporated in the State of Delaware in 1993 under the name SCP Holding Corporation, and in 1995 changed its name to SCP Pool Corporation.
The swimming poolIn October 2005, we acquired Automatic Rain Company, a leading regional wholesale distributor of irrigation and landscape products serving professional contractors in the landscape construction and maintenance markets, through our newly formed and wholly owned subsidiary Horizon Distributors, Inc. (Horizon). Our acquisition of Horizon expands our complementary product offerings and provides us with a solid distribution platform in the irrigation and landscape marketplace.
Our industry is highly fragmented, and as such, we add considerable value to the industry by purchasing products from a large number of manufacturers and then distributing the products and offering a range of services to our customer base on conditions that are more favorable than these customers could obtain on their own.
As of February 14,December 31, 2005 we operated 203246 customer service centers in North America and Europe.
Net sales by geographic region were as follows (in thousands):
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| 2004 |
| 2003 |
| 2002 |
United States | $ | 1,226,654 | $ | 1,094,035 | $ | 945,357 |
International |
| 84,199 |
| 61,797 |
| 37,889 |
| $ | 1,310,853 | $ | 1,155,832 | $ | 983,246 |
Property and equipment by geographic region were as follows (in thousands):
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| 2004 |
| 2003 |
| 2002 |
United States | $ | 16,214 | $ | 22,535 | $ | 19,996 |
International |
| 2,381 |
| 2,108 |
| 925 |
| $ | 18,595 | $ | 24,643 | $ | 20,921 |
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, definitive proxy statements pursuant to Regulation 14A, current reports on Form 8-K, and any amendments to those reports, are made available free of charge on our website at www.poolcorp.comas soon as reasonably practicable after we file these reports with the Securities and Exchange Commission.
The Swimming Pool Industry
We believe that the swimming pool industry is relatively young, with room for continued growth from increased penetration of new pools. Of the approximately 69 million homes in the United States that have the economic capacity and the yard space to have a swimming pool, approximately 11%12% own a pool. The industry has grown at a 4 to 5%6% annual rate for the past several years. New homes are being constructed at a higher rate over the last 3-5 years, which creates even more potential pool owners annually.
We believe the swimming pool industry will continue to grow at a rate of approximately 4 to 5% annually over the next five years, primarily because of favorable demographic and socioeconomic trends, as well as the expected continued growth in housing starts in warmer markets and the need to maintain the growing installed base of pools and secondarily because of new pool installations.pools. We expect our sales growth to be higher than the industry average due to increases in market share and expansion of our product offerings.
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SCP POOL CORPORATION
Part I.
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A large portion of consumer spending in our industry is derived from the maintenance of existing swimming pools, including the repair and replacement of the equipment for those pools. We believe that consumer demand for qualified pool builders, particularly in larger pool markets, will continue to outweigh the supply. Thus, the industry has generally not been negatively affected by economic downturns, although there is no assurance that this will continue.
The demand for new pools is driven by the perceived benefits of pool ownership including relaxation, entertainment, family activity, exercise convenience and landscaping.convenience. The industry competes for new pool sales against other discretionary consumer purchases such as kitchen and bathroom remodeling, boats, motorcycles, recreational vehicles and vacations.
The industry has been positively impacted by the trend for increased homeowner spending on outdoor living spaces for relaxation and entertainment. Additionally, the developing trend in recent years is for consumers to bundle the purchase of a pool with other products as part of a complete backyard makeover. New irrigation systems and landscaping are often key components to completing a swimming pool installation or remodel. The irrigation and landscape market has many characteristics in common with the pool industry, and we believe that it benefits from the same favorable demographic and socioeconomic trends and will realize growth rates similar to the pool industry.
Our industry is seasonal, and weather is the principal external factor which affects our business. Peak industry activity occurs during the warmest months of the year, typically MayApril through August.September. The industry is also affected by other factors including consumer saving and discretionary spending levels, the increase in pool eligible households and consumer attitudes toward pool and landscape products for environmental or safety reasons.
Business Strategy and Growth
Our mission is to provide exceptional value to our customers and suppliers, in order to provide exceptional return to our shareholders while providing exceptional opportunities to our employees. Our three core strategies are to promote the growth of theour industry, to promote the growth of our customers’ businesses and to continuously strive to operate more effectively.
We promote the growth of the swimming pool industry through various advertising and promotional programs intended to raise consumer awareness of the benefits and affordability of pool ownership, the ease of pool maintenance and the many ways in which a pool and the surrounding spaces may be enjoyed beyond swimming. These programs include media advertising, industry-oriented website development such aswww.swimmingpool.com™ and public relations campaigns, which are toolsand we use these programs as tools to educate consumers and lead prospective pool owners to our customers.
We promote the growth of our customers’ businesses through comprehensive support programs that offer promotional tools and marketing support to help generate increased sales for our customers. Our uniquely tailored programs include such thingsfeatures as customer lead generation, personalized websites, brochures, marketing campaigns and business development training. As a customer service, we also provide certain retail store customers assistance with everything from site selection to store layout and design to business management system implementation.
We strive to operate more effectively by continuously focusing on improvements in our operations such as product sourcing, procurement and logistics initiatives, adoption of enhanced business practices and improved working capital management.
In addition to our efforts aimed at industry and customer growth, we have increased our product breadth, as described in the Customers“Customers and ProductsProducts” section below, and expanded our service center network through acquisitions and by opening new service centers.center openings.
We have grown organically through increases in base business sales of 14% in 2005, 10% in 2004 and 11% in 2003 and 10% in 2002.2003. Since 2000,2001, we have opened 2823 new service centers. Acquisitions have historically been an important source of sales growth as well, and since 2000,2001, we have successfully completed 1213 acquisitions, consisting of 7493 service centers (net of service center closings and consolidations).
We acquired a total of 42 service centers in 2005, including 40 service centers through our acquisition of Horizon in October 2005. For additional discussion of our recent acquisitions, see Note 2
SCP POOL CORPORATION
Part I.
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of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K. We intend to pursue additional strategic acquisitions, although at a reduced rate from historical levels, which will allow us to further penetrate existing markets and expand into new geographic markets and product categories. For additional discussioninformation regarding our sources and uses of recent acquisitions,cash, you should read Note 3 to the Consolidated Financial Statements. You should also read the Liquidity and Capital Resources section of Item 7, Management’s“Managements Discussion and Analysis of Financial Condition and Results of Operations.Operations - LIQUIDITY AND CAPITAL RESOURCES,” of this Form 10-K.
Customers and Products
We serve roughly 48,00068,000 customers, none of which account for more than 1% of our sales. We primarily serve threefive types of customers:
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These
The majority of these customers are mostly small, family owned businesses with relatively limited capital resources. We maintain a strict credit policy. In the past, losses from customer receivables have been within our expectations.
We conduct our operations through 203246 service centers in North America and Europe. Our primary markets, which have the highest concentration of swimming pools, are California, Florida, Texas and Arizona, representing approximately 51%54% of our net sales in 2004.2005. We use a combination of nationalinternational and local sales and marketing personnel to promote the growth of our business and develop and strengthen our customers’ businesses. Our nationalinternational personnel focus on developing customer programs and promotional activities, creating and enhacingenhancing sales management tools and providing product and market expertise. Our local sales personnel work from the service centers and are charged with understanding and meeting our customers’ specific needs.
We offer our customers more than 91,000100,000 national brand and private label products. We believe that our selection of pool equipment and supplies, chemicals, replacement parts and complementary products is the most comprehensive in the swimming pool industry. The products we sell can be categorized as follows:
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pool equipment and materials for new pool construction and the remodeling of existing pools; and
| - | construction materials used for pool installations and remodeling, such as concrete, plumbing and electrical components and pool surface and decking materials; |
| - | irrigation and landscape products, including professional lawn care equipment; and |
| - | other discretionary recreational and related outdoor lifestyle products that enhance consumers use and enjoyment of | ||
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SCP POOL CORPORATION
Part I.
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Maintenance products and repair and replacement parts are non-discretionary in nature, meaning that these items must be purchased by pool ownersend-users to maintain existing swimming pools.pools and landscaped areas. Over 60% of our gross profits are derived from the sale of products used to maintain and repair the installed base of poolsthese existing features and less than 40% are derived from the construction and installation (equipment, building materials, plumbing, electrical)electrical, etc.) of new in-groundpools and above-ground pools.landscaping.
InOur complementary product sales grew 32% in 2005, excluding Horizon, and have grown from approximately $3.0 million in 1999 to over $140.0 million in 2005. This growth has been an effortimportant factor in our base business sales growth over the past six years. Including Horizon’s fourth quarter 2005 sales, complementary products sales grew 76% over 2004 and accounted for nearly 12% of our total net sales at comparable margins to provide more of a one-stop shopping experience for our customers, we began to offer products which our customers traditionally purchased from other suppliers. These products, which we refer to as Complementary Products, include:traditional product offerings.
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We have identified other product categories that could become part of our Complementary Productcomplementary product offerings in the future. We typically choose two to three categories each year and introduce them in certain markets. We then evaluate the performance of these test categories and focus on those which we believe exhibit long-term growth potential.
POOL’s Complementary Products sales have grown from $3 million in 1999 to over $100 million in 2004. This growth has been an important factor in our base business sales growth over the past six years. Complementary Product sales grew 27% in 2004 and accounted for nearly 8% of our total net sales at comparable margins to our traditional product offerings. In 2005,2006, we intend to continue to expand our Complementary Productscomplementary products initiative by
increasing the number of locations which offer Complementary Products,complementary products, increasing the number of Complementary Productscomplementary products offered at certain locations and also through a modest broadening of the product offerings on a company-wide basis. We expect Complementary Productcomplementary product sales to approach 10%20% of our total sales in 2005.2006.
Operating Strategy
We operate twothree distribution networks in North America:networks: the SCP Distributors network (SCP) andnetwork, the Superior Pool Products (Superior) network and the Horizon Distributors (Horizon) network. The SCP network consists of 142145 service centers, including 1112 locations in Europe, and the Superior network consists of 61 locations and the Horizon network consists of 40 locations.
We distribute swimming pool supplies, equipment and related leisure products through our SCP and Superior networks and we distribute irrigation and landscape products through our Horizon network. We adopted thisthe strategy of operating two distinct distribution networks within the swimming pool marketplace primarily for two reasons:
| 1. | To offer our customers a choice of different distributors, featuring distinctive product selections and |
| 2. | To increase the level of customer service and operational efficiency provided by the service centers in each network by promoting healthy competition between the two networks. |
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SCP POOL CORPORATION
Part I.
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OurWe evaluate our service centers are evaluated based upon their performance relative to predetermined standards that include both financial and operational measures. Our corporate support groups provide our field operations with various services including customer and vendor related programs, information systems support and expert resources to use to help achieve their goals. We employ incentive programs and feedback mechanisms along with the competitive nature of our internal networks to stimulate performance.
Employees
We employed approximately 2,700 people at February 14, 2005. Given the seasonal nature of our business, our peak employment period is the summer, when we add up to 15% more employees to our work force to meet seasonal demand.
Distribution
Our service centers are located near customer concentrations, typically in industrial, commercial or mixed-use zones. Customers may pick up products at any service center location, or products may be delivered via our trucks or third party carriers.
Our service centers maintain well-stocked inventories to meet customers’ immediate needs. We utilize warehouse management technology to optimize receiving, inventory control, picking, packing and shipping functions.
In addition, we operate five centralized shipping locations and two construction materials centers that redistribute products we purchase in bulk quantities to our service centers or directly to customers.
Purchasing and Suppliers
We enjoy good relationships with our suppliers, who generally offer competitive pricing, return policies and promotional allowances. It is customary in the swimming pool supplyour industry for manufacturers to seasonally offer extended payment terms to qualifying purchasers such as POOL. These terms are typically available to us for pre-season or early season purchases.
We initiated a preferred vendor program in 1999 which encourages our buyers to purchase products from a smaller number of vendors. We work closely with these vendors to develop programs and services to better meet the needs of our customers and concentrate our purchasing activities. These practices, together with a more comprehensive service offering, have resulted in improved margins at the service center level.
We regularly evaluate supplier relationships and consider alternate sourcing to assure competitive cost, service and quality standards. Our largest suppliers include Pentair Corporation, Hayward Pool Products, Inc. and Waterpik Technologies, Inc., which accounted for approximately 16%20%, 9%13% and 7%, respectively, of the cost of products we sold in 2004.2005.
Competition
Based on industry knowledge and available data, management believes POOL iswe are the largest wholesale distributor in theof swimming pool supply industry,and related backyard products, and the only truly national wholesale distributor focused on the swimming pool industry in the United States. Additionally, we are one of the top three regional distributors of landscape and irrigation products in the United States. We face intense competition from many regional and local distributors in our markets and to a
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SCP POOL CORPORATION
Part I.
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lesser extent, mass-market retailers and large pool supply retailers with their own internal distribution networks. We also compete against one national wholesale distributor of landscape and irrigation products.
Some geographic markets we serve, particularly our largest, higher density markets in California, Florida, Texas and Arizona, are more competitive than others. Barriers to entry in the swimming pool supplyour industry are relatively low. We compete with other distributors for rights to distribute brand-name products. If we lose or are unable to obtain these rights, we might be materially and adversely affected. We believe that the size of our operations allows us to compete favorably for such distribution rights.
We believe that the principal competitive factors in swimming pool and landscape supply distribution are:
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We believe that we generally compete favorably with respect to each of these factors.
Seasonality and Weather
SeeFor a discussion regarding seasonality and weather, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Fluctuations”.Fluctuations,” of this Form 10-K.
Environmental, Health and Safety Regulations
Our business is subject to regulation under local fire codes and federal, state and local environmental and health and safety requirements including:
the Emergency Planning and Community Right-to-Know Act and other Environmental Protection Agency regulations;
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Most of these requirements govern the packaging, labeling, handling, transportation, storage and sale of pool chemicals.chemicals and landscape chemicals and fertilizers. We store certain types of chemicals and/or fertilizers at each of our service centers. Thecenters, and the storage of these chemicalsitems is strictly regulated by local fire codes. In addition, we sell algaecides and pest control products that are regulated as pesticides under the Federal Insecticide, Fungicide and Rodenticide Act and various state pesticide laws. These laws are primarily relaterelated to labeling, annual registration and annual registration.licensing.
Employees
We employed approximately 3,200 people at December 31, 2005. Given the seasonal nature of our business, our peak employment period is the summer, when we add up to 15% more employees to our work force to meet seasonal demand.
Intellectual Property
We maintain both domestic and foreign registered trademarks primarily for our private label products, and we intend to maintain the trademark registrations that are important to our current and future business operations. We also own rights to several Internet domain names.
Geographic Areas
Net sales by geographic region were as follows for the past three fiscal years (in thousands):
| Year Ended December 31, | |||||||||||
| 2005 | 2004 | 2003 | |||||||||
| United States | $ | 1,442,332 | $ | 1,226,654 | $ | 1,094,035 | |||||
| International | 110,327 | 84,199 | 61,797 | ||||||||
| $ | 1,552,659 | $ | 1,310,853 | $ | 1,155,832 | ||||||
Net property and equipment by geographic region was as follows (in thousands): | |||||||||||
| December 31, | |||||||||||
| 2005 | 2004 | 2003 | |||||||||
United States | $ | 22,520 | $ | 16,214 | $ | 22,535 | |||||
International | 3,078 | 2,381 | 2,108 | ||||||||
| $ | 25,598 | $ | 18,595 | $ | 24,643 | ||||||
6Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our website at www.poolcorp.com as soon as reasonably practical after we electronically file such reports with, or furnish them to, the Securities and Exchange Commission.
Additionally, we have adopted a Code of Business Conduct and Ethics, applicable to all employees, officers and directors, which is available free of charge on our website.
Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
Our disclosure and analysis in this report contains forward-looking information that involves risks and uncertainties. Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of future performance, statements of management’s plans and objectives, future contracts, and forecasts of trends and other matters. 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:
We are susceptible to adverse weather conditions.
Weather is the principal external factor affecting our business. For example, unseasonably late warming trends can decrease the length of the pool season and unseasonably cool weather or extraordinary rainfall during the peak season can decrease swimming pool use, installation and maintenance, as well as landscape installations and maintenance. These weather conditions adversely affect sales of our products. For a discussion regarding seasonality and weather, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Fluctuations,” of this Form 10-K.
Our distribution business is highly dependent on our ability to maintain favorable relationships with suppliers and manufacturers.
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 Waterpik Technologies, Inc., which accounted for approximately 20%, 13% and 7%, respectively, of the costs of products we sold in 2005. While we do not believe that the loss of any single supplier would adversely affect our business, 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. 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 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 2005, also tend to be more competitive than others.
More aggressive competition by mass merchants 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.
The demand for our swimming pool and related outdoor lifestyle products may be adversely affected by economic downturns.
In economic downturns, the demand for swimming pool or leisure related products may decline as discretionary consumer spending, the increase in pool eligible households and swimming pool construction decline. Although maintenance products and repair and replacement equipment that must be purchased by pool owners to maintain existing swimming pools account for more than 60% of our gross profits, the growth of our business depends on the expansion of the installed pool base, which may be viewed by most consumers as a discretionary expenditure that may be adversely affected by economic downturns.
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 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.
We may not be able to sustain our pace of growth.
We have experienced substantial sales growth in recent years through acquisitions and new service center openings that have increased our size, scope and geographic distribution. Since 2001, we have opened 23 new service centers and have completed 13 acquisitions including our acquisition of Horizon in October 2005. These acquisitions have added 93 service centers, net of service center closings and consolidations, and a centralized shipping location to our distribution networks. While we contemplate continued growth through acquisitions and internal expansion, no assurance can be made as to our ability to:
SCP POOL CORPORATION
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.
Part I.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 aswww.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 2005, approximately 64% of our net sales and 89% 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 pool chemicals and landscape chemicals and fertilizers. For example, we sell algaecides and pest control products that are regulated as pesticides under the Federal Insecticide, Fungicide and Rodenticide Act and various state pesticide laws. These laws are primarily related to labeling, annual registration and licensing.
Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties or the imposition of injunctive relief. Moreover, compliance with such laws and regulations in the future could prove to be costly, and there can be no assurance that we will not incur such costs in material amounts. These laws and regulations have changed substantially and rapidly over the last 20 years, and we anticipate that there will be continuing changes. The clear trend in environmental, health, transportation and safety regulation is to place more restrictions and limitations on activities that impact the environment, such as the use and handling of chemical substances. Increasingly, strict restrictions and limitations have resulted in increased 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 service 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 and managing foreign subsidiary operations, uncertain political and regulatory conditions, foreign currency fluctuations, adverse tax consequences and dependence on foreign economies.
We source certain products we sell, including our private label products, from Asia and other foreign locations. There is a significant 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 foreign trade, such as tariffs, currency exchange rates, transportation costs and inflation are beyond our control.
A terrorist attack or the threat of a terrorist attack could have a material adverse effect on our business.
The terrorist attacks that took place on September 11, 2001, in the U.S. were unprecedented events that have created many economic and political uncertainties, some of which may materially impact our business. Discretionary spending on leisure products such as ours is generally adversely affected during times of economic uncertainty. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties, which could adversely affect our business for the short or long-term in ways that cannot presently be predicted.
Item 1B. Unresolved Staff Comments
None.
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We lease the POOL corporate and SCP Distributors LLC administrative offices, which consist of approximately 40,00050,000 square feet of office space in Covington, Louisiana.Louisiana, from an entity in which we have a 50% ownership interest. We own three service centers in Florida. All of our other properties are leased for terms that expire between 20052006 and 2017.2026. In addition to minimum rental payments, which are set at competitive rates, certain leases require reimbursement for taxes, maintenance and insurance. Most of our leases contain renewal options, some of which involve rent increases.
Our service centers range in size from approximately 3,000 square feet to 100,000 square feet and generally consist of warehouse, counter, display and office space. Our centralized shipping locations and construction materials centers range in size from 33,00016,000 square feet to 57,000132,000 square feet.
We believe that our facilities are well maintained, suitable for our business and occupy sufficient space to meet our operating needs. As part of our normal business, we regularly evaluate service center performance and site suitability and may relocate a service center or consolidate two locations if a service center is redundant in a market, under performing or otherwise deemed unsuitable. We do not believe that any single lease is material to our operations.
7
SCP POOL CORPORATION
Part I.
|
|
The table below identifies the number of service centers by state and foreign country as of February 14,December 31, 2005:
Location |
Service Centers | |
United States | ||
California | 52 | |
Florida |
| |
|
| |
Texas | 16 | |
Arizona |
| 15 |
| 7 | |
Tennessee | 7 | |
Alabama |
| |
| 6 | |
New York | 6 | |
Oregon | 6 | |
Washington | 6 | |
Nevada | 5 | |
New Jersey | 5 | |
Ohio |
| |
|
| |
Indiana | 4 | |
Louisiana | 4 | |
Missouri | 4 | |
North Carolina | 4 | |
Pennsylvania | 4 | |
| 3 | |
Illinois | 3 | |
Michigan |
| |
| 3 | |
Oklahoma | 3 | |
Virginia | 3 | |
Arkansas | 2 | |
Kansas | 2 | |
Massachusetts | 2 | |
Minnesota | 2 | |
South Carolina | 2 | |
Connecticut | 1 | |
Iowa | 1 | |
Idaho | 1 | |
Kentucky | 1 | |
Maine | 1 | |
Maryland | 1 | |
Mississippi | 1 | |
Nebraska | 1 | |
New Mexico | 1 | |
Utah | 1 | |
Wisconsin | 1 | |
Total United States | 227 | |
International | ||
Canada | 6 | |
France | 4 | |
United Kingdom |
| |
| 3 | |
|
| |
|
| |
|
| |
|
| |
|
| |
Portugal |
| |
| 2 | |
Spain | 2 | |
|
| |
| 1 | |
|
| |
|
| |
|
| |
Mexico | 1 | |
|
| 19 |
|
| 246 |
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| |
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| |
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| |
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| |
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8
SCP POOL CORPORATION
Part I.
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From time to time, we are subject to various claims and litigation arising in the ordinary course of business, including product liability, personal injury, commercial, contract and employment matters. With respect to product related matters, we believe that if any such product related cases are determined in favor of a claimant, the manufacturers of such products would have primary responsibility for any damages because we are a distributor of finished goods manufactured by third parties, although no assurance can be given. While the outcome of any litigation is inherently unpredictable, we do not believe, based on currently available facts, that the ultimate disposition of any of these matters will have a material adverse impact on our financial condition, results of operations or cash flows.
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No matters were submitted to a vote of our stockholders during the quarter ended December 31, 2004.2005.
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities
Our common stock began trading on the Nasdaq National Market under the symbol “POOL” in October 1995. On February 14, 2005,13, 2006, there were approximately 26,37728,130 beneficial holders of our common stock.
The table below sets forth the high and low sales prices of our common stock andas well as dividends declared for each quarter during the last two fiscal years. The prices and dividends for 2003 and the first two quarters of 2004 have been adjusted to reflect the three-for-two stock split effective September 10, 2004.
| High | Low | Dividends Declared | |||||||
Fiscal 2005 | |||||||||
First Quarter | $ | 34.82 | $ | 28.59 | $ | 0.070 | |||
Second Quarter | 36.87 | 30.06 | 0.090 | ||||||
Third Quarter | 38.08 | 33.46 | 0.090 | ||||||
Fourth Quarter | 39.89 | 31.59 | 0.090 | ||||||
Fiscal 2004 | |||||||||
First Quarter | $ | 25.11 | $ | 20.57 | $ | — | |||
Second Quarter | 30.24 | 24.25 | 0.067 | ||||||
Third Quarter | 31.26 | 26.13 | 0.067 | ||||||
Fourth Quarter | 32.40 | 24.80 | 0.070 | ||||||
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| Dividends |
| Fiscal Year |
|
| High |
|
| Low |
|
| Declared |
| 2004 |
|
|
|
|
|
|
|
| |
| First Quarter | $ | 25.11 |
| $ | 20.57 |
| $ | — | |
| Second Quarter |
| 30.24 |
|
| 24.25 |
|
| 0.067 | |
| Third Quarter |
| 31.26 |
|
| 26.13 |
|
| 0.067 | |
| Fourth Quarter |
| 32.40 |
|
| 24.80 |
|
| 0.070 | |
| 2003 |
|
|
|
|
|
|
|
| |
| First Quarter | $ | 13.64 |
| $ | 11.15 |
| $ | — | |
| Second Quarter |
| 15.49 |
|
| 13.11 |
|
| — | |
| Third Quarter |
| 19.67 |
|
| 14.57 |
|
| — | |
| Fourth Quarter |
| 24.90 |
|
| 18.43 |
|
| — | |
InWe initiated quarterly dividend payments to our shareholders in the second quarter of 2004, and we initiated ahave continued payments in each subsequent quarter. Our Board of Directors (our Board) increased the dividend payment to our shareholders, which we continued in the third quarter and increasedamount in the fourth quarter.quarter of 2004 and again in the second quarter of 2005. Payment of future dividends will be at the discretion of our Board, of Directors, after taking into account various factors, including earnings, capital requirements and surplus, financial position, contractual restrictions and other relevant business considerations. We plan to continue to pay quarterly dividends, but there can be no assurance that dividends will be declared or paid any time in the future if our Board of Directors deems that there is a better use of those funds.
9
SCP POOL CORPORATION
Part II.
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities (continued)
The table below summarizes the repurchases of our common stock in the fourth quarter of 2004.2005.
Issuer Purchases of Equity Securities
| Total number of shares | Maximum approximate | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total number of | Average price | purchased as part of | dollar value that may yet be | |||||||||||
| Period | shares purchased | paid per share | publicly announced plan (1) | purchased under the plan | Total number of shares purchased(2) | Average price paid per share | Total number of shares purchased as part of publicly announced plan(1) | Maximum approximate dollar value that may yet be purchased under the plan | ||||||
| October 1-31, 2004 | 670,722 | $ 26.23 | 670,722 | $27,402,231 | ||||||||||
October 1-31, 2005 | 751,887 | $ | 33.01 | 707,100 | $ | 3,248,275 | ||||||||
November 1-30, 2005 | — | — | — | 50,000,000 | ||||||||||
December 1-31, 2005 | 23,937 | 38.46 | — | 50,000,000 | ||||||||||
| (1) | 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, when approximately $17.6 million of the amount authorized remained available for share repurchases, 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. In November 2005, when approximately $3.2 million of the amount authorized remained available for share repurchases, 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, all of which remained available as of February 17, 2006. |
(1) In July 2002, our Board of Directors authorized $50.0 million for the repurchase of shares of our common stock in the open market. In August 2004, when approximately $17.6 million of the amount authorized remained available for share repurchases, our Board of Directors increased the authorization for the repurchase of shares of our common stock in the open market to a total of $50.0 million of which approximately $27.4 million remained available as of February 14, 2005.
| (2) | These shares 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 granted under our 1995 and 1998 Stock Option Plans. |
10
SCP POOL CORPORATION
Part II.
|
The table below sets forth selected financial data from the Consolidated Financial Statements. You should read this information in conjunction with the discussions in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”this Form 10-K and with the Consolidated Financial Statements and accompanying Notes.Notes in Item 8 of this Form 10-K.
(In thousands, except per share data) |
|
|
| Year Ended December 31, (1) | |||||||||||||||||||||||||||||
|
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| 2004 |
| 2003 |
| 2002 |
| 2001 |
| 2000 |
| ||||||||||||||||||||
| Year Ended December 31,(1) | |||||||||||||||||||||||||||||||||
(in thousands, except per share data) | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||||||||||
Statement of Income Data | Statement of Income Data |
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| |||||||||||||||||||||
Net sales | Net sales | $ | 1,310,853 | $ | 1,155,832 | $ | 983,246 | $ | 854,234 | $ | 672,273 |
| $ | 1,552,659 | $ | 1,310,853 | $ | 1,155,832 | $ | 983,246 | $ | 854,234 | |||||||||||
Net income | Net income |
| 66,941 |
| 50,848 |
| 41,303 |
| 35,444 |
| 28,076 |
| 83,621 | 66,941 | 50,848 | 41,303 | 35,444 | ||||||||||||||||
Earnings per share |
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Earnings per share: | |||||||||||||||||||||||||||||||||
Basic | $ | 1.59 | $ | 1.27 | $ | 0.96 | $ | 0.76 | $ | 0.62 | |||||||||||||||||||||||
Diluted | 1.50 | 1.19 | 0.91 | 0.72 | 0.59 | ||||||||||||||||||||||||||||
Cash dividends declared per common share | 0.34 | 0.20 | — | — | — | ||||||||||||||||||||||||||||
| Basic | $ | 1.27 |
| 0.96 |
| 0.76 |
| 0.62 |
| 0.49 |
| |||||||||||||||||||||
| Diluted | $ | 1.19 |
| 0.91 |
| 0.72 |
| 0.59 |
| 0.47 |
| |||||||||||||||||||||
Cash dividends declared per common share | $ | 0.20 |
| — |
| — |
| — |
| — |
| ||||||||||||||||||||||
Balance Sheet Data | Balance Sheet Data |
|
|
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Working capital (2) | Working capital (2) | $ | 128,189 | $ | 60,030 | $ | 144,174 | $ | 136,856 | $ | 88,908 |
| $ | 194,571 | $ | 128,189 | $ | 60,030 | $ | 144,174 | $ | 136,856 | |||||||||||
Total assets | Total assets |
| 480,866 |
| 450,272 |
| 402,094 |
| 348,590 |
| 251,905 |
| 736,636 | 480,866 | 450,272 | 402,094 | 348,590 | ||||||||||||||||
Total long-term debt, including current portion | Total long-term debt, including current portion |
| 54,910 |
| 48,346 |
| 129,602 |
| 85,091 |
| 40,991 |
| 132,584 | 54,910 | 48,346 | 129,602 | 85,091 | ||||||||||||||||
Stockholders’ equity | Stockholders’ equity |
| 220,335 |
| 195,241 |
| 141,941 |
| 144,572 |
| 123,195 |
| 272,980 | 220,335 | 195,241 | 141,941 | 144,572 | ||||||||||||||||
Other | Other |
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|
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|
|
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| ||||||||||||||||||||
Base business sales growth (3) | Base business sales growth (3) |
| 10 | % | 11 | % | 10 | % | 3 | % | n/c |
| 14 | % | 10 | % | 11 | % | 10 | % | 3 | % | |||||||||||
Number of service centers at year end |
| 201 |
| 197 |
| 185 |
| 172 |
| 129 |
| ||||||||||||||||||||||
Number of service centers | 246 | 201 | 197 | 185 | 172 | ||||||||||||||||||||||||||||
| (1) | During the years 2001 to 2005, we successfully completed 13 acquisitions consisting of 109 service centers, of which 15 were closed or consolidated into existing service centers. For information about our recent acquisitions, see Note 2 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K. |
| (2) | The approximate 52% increase in working capital from 2004 to 2005 is due primarily to a greater amount of early buy inventory purchases that we made and received during the fourth quarter of 2005 and the Horizon acquisition. This increase was partially offset by the deferral of our third and fourth quarter 2005 estimated federal income tax payments. For further discussion, see the “LIQUIDITY AND CAPITAL RESOURCES” section included in Item 7 of this Form 10-K. |
(1)During the years 2000 to 2004, we successfully completed 12 acquisitions consisting of 88 service centers, of which 14 were closed or consolidated into existing service centers. For further discussion, see Item 1.
(2)The approximate 58% decrease in working capital from 2002 to 2003 is due to long-term debt related tothe classification of our former revolving line of credit whichbalance and the addition of short-term financing. Since this revolving line of credit expired in November 2004, and was classified as currentthe outstanding balance at December 31, 2003 and also to anwas classified as current. The accounts receivable securitization facility that we entered into in 2003 which is also classified as current. The revolving line of credit was renegotiated in November 2004 for a five year period and borrowings under this facility are classified as long-term debt at December 31, 2004.
(3)We calculate base business sales growth by excluding the following service centers from the calculation for 15 months: (i) service centers acquired within the past 15 months, (ii) service centers consolidated with acquired locations and (iii) new service centers opened in new markets within the past 15 months. Base business sales growth was not calculated prior to 2001.
11
| (3) | For a discussion regarding our calculation of base business sales growth, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - RESULTS OF OPERATIONS,” of this Form 10-K. |
SCP POOL CORPORATION
Part II.
Overview
Our 20042005 financial results reflect the continuing execution of our strategies to growfor profitable revenue growth. We have built on our core strengths with a focus on growing our customers’ businesses faster than the overall market including the introduction of new products to our existing customer base, and to incrementally improveimproving all aspects of our business operations.
Net sales grew 13%18% to $1.55 billion in 2005 compared to $1.31 billion in 2004 compared to $1.16 billion in 2003.2004. This is slightly lowerhigher than the 18%13% sales growth experienced in 2003 and 15% in 2002 as one of our vehicles for sales growth, acquisitions, was lower than historical levels, a trend we expect2004 due primarily to continue. Growththe increase in our base business growth rate as well as fourth quarter sales from acquired service centers, which includes the 40 Horizon service centers acquired in October 2005. Our base business growth has been relatively stable at 14%, 10% and 11% for 2005, 2004 and 2003, respectively. This growth contrasts with the growth of the overall market for swimming pool equipment and supplies, which we estimate grew on average from 4% to 6% per year over this same time period at 10%, 11% and 10% for 2004, 2003 and 2002, respectively.period. We attribute much of thisour growth to the success of the programs we offer to our customers, which are aimed at growing their businesses. This contrastsIn 2005, product pricing also contributed to the sales growth as we were able to pass most vendor price increases through to customers.
Our gross profit as a percent of net sales (gross margin) decreased by approximately 40 basis points in 2005 compared to 2004, reflecting the impact of the divestiture of our North American manufacturing assets in December 2004.
Our operating income increased 24% to $140.3 million in 2005 due primarily to the growth in sales, as well as our ability to leverage our existing distribution and administrative infrastructure and our success with ongoing operational improvements. Net income increased 25% in 2005 and included $1.5 million of net equity earnings from our investment in Latham Acquisition Corporation (LAC).
Financial Position and Liquidity
In 2005, both our cash flow provided by operations and year-end working capital balance were impacted by a greater amount of early buy inventory purchases that we received as of year-end. We made aggressive inventory purchases during the fourth quarter of 2005 to take advantage of price discounts and to mitigate the potential adverse gross margin impact of expected 2006 price increases.
As a result of the inventory purchases received and paid for in the fourth quarter of 2005, which totaled approximately $53.0 million, partially offset by the deferral of third and fourth quarter 2005 estimated federal income tax payments, our cash from operations decreased to $38.1 million in 2005 from $56.4 million in 2004. Coupled with net proceeds from financing activities of approximately $119.5 million, cash from operations helped fund our acquisition of Horizon in the fourth quarter of 2005, $32.1 million of share repurchases in 2005 and the payment of our quarterly cash dividend to shareholders, which we increased in the second quarter of 2005.
Our year-end inventory levels increased 69% to $330.6 million as of December 31, 2005, due primarily to our increased early buy inventory purchases and the Horizon acquisition. As a result of this increase, inventory turns decreased slightly to 4.3 days in 2005 from 4.5 days in 2004. Days sales outstanding (DSO) remained consistent between years at 33.6 days for fiscal 2005 compared to 33.4 days for fiscal 2004. We continue to maintain a healthy current ratio, which was down slightly to 1.6 as of December 31, 2005 compared to 1.7 as of December 31, 2004.
OUTLOOK
We believe that the following factors will contribute to net sales growth in 2006:
We believe that complementary products will continue to grow at a faster rate than our overall market for swimming pool equipment and supplies, which we estimate grew from 4% to 5% per year over this same time period.
Weather is the single biggest external factor impacting our business, and we believe our operating results in 2004 were impacted by the less than favorable weather conditions throughout muchsales growth, with an acceleration of the United States. Although we experienced favorable weather conditionscomplementary products growth rate in the western portionfirst three quarters of 2006, compared to the United States, muchsame period in 2005, due to the addition of Horizon’s products to our complementary product offerings. Including Horizon’s sales, complementary products should comprise approximately 20% of net sales for the centralfull year 2006.
We expect to continue to increase our focus on supply chain management initiatives, including expansion of international sourcing and northeastern regions experienced unusually coldprivate label opportunities, particularly where margin expansion opportunities exist. We also plan to make further advances in working capital management to achieve continued operational improvements in 2006 and wet conditionsbeyond.
We expect a positive contribution from equity earnings from our investment in the peak summer season, which adversely impacted our business. The impact of weather on the poolLAC in 2006. LAC’s business is highly seasonal and more heavily weighted to northern markets, we serve drives the seasonal nature of our business. Our peak selling season is the second quarter, followed by the third quarter, with the first and fourth quarters being the weakest. Our working capital needs tendslowest parts of the year and the second and third quarters being the busiest.
We plan to precedeuse the seasonal impact by twomodified-retrospective transition method under SFAS 123(R),Share-Based Payment. As such, we will adjust prior period financial statements beginning in the first quarter of 2006 to three months.
Our results reflect the continued drive into newer product areas,impact of stock option expense for amounts previously reported in our pro-forma footnote disclosures required by SFAS 123,Accounting for Stock-Based Compensation. Our 2005 fully diluted earnings per share was $1.50 as salesreported, or $1.45 after adjusting for the impact of Complementary Products have grown from $3 million since 1999 to over $100 million in 2004. In 2004, Complementary Product sales grew 27% over 2003 and accounted for 8% of our total net sales. These products, which our customers historically purchased from other suppliers, carry gross margins comparable to our traditional product categories. Additionally, we have recognized some incremental benefits through the utilization of our existing distribution infrastructure. Our service centers have augmented their product offerings with Complementary Products at various rates based upon an assortment of factors including regional market conditions.stock option expense. We supplement our Complementary Product offerings each year to some degree by adding new productsbelieve that we believe2006 earnings per share will be of interest to our customers and discontinuing products that are less promising. Overall, we expect Complementary Product sales to continue to grow at a rate much faster than the growth rate of our traditional product offerings, approaching 10% of net sales in 2005.
Our net income increased 32% to $66.9 million in 2004 due primarily to the growth in sales and to other ongoing improvements in our operations, such as product sourcing, procurement and logistics initiatives, adoption of enhanced business practices and improved working capital management. We expect to make continued operational improvements in the future.range of $1.70 to $1.75 per diluted share, including an expected $0.06 impact from stock option expensing.
During 2004, as more fully described in the Liquidity and Capital Resources section below, we executed a new five-year Credit Facility that, along with our accounts receivables securitization facility, is our primary source of funds to meet our capital needs. In the second quarter of 2004, we initiated a dividend payment to our shareholders, which we continued in the third quarter and increased in the fourth quarter. The initiation of this dividend reflects our beliefWe believe that over the long term, we will 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 a dividend payment.
12
SCP POOL CORPORATION
Part II.
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In December 2004, we exchanged the assets of our manufacturing facilities in Fort Wayne, Indiana and Quebec, Canada for three distribution sites in Ontario, Canada and a minority equity interest in Latham Acquisition Corporation, as more fully described herein. We believe this transaction will allow us to focus more on our core distribution business while also providing us with a strategic relationship with an important supplier.payments.
Our business is subject to significant risks, including weather, competition, general economic conditions and other risks as detailed below in Item 1A of this Form 10-K.
CRITICAL ACCOUNTING ESTIMATES
We prepare our “Cautionary Statement for Purpose of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995”.
Critical Accounting Policies
Critical accounting policies are those that are both important to the accurate portrayal of a company’s financial condition and results, and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
In order to prepareconsolidated financial statements that conform toin accordance with U.S. generally accepted accounting principles generally accepted in the United States (GAAP), wewhich requires management to make estimates and assumptions that affect reported amounts and related disclosures. Management identifies critical accounting estimates as:
Management has discussed the development, selection and disclosure of our critical accounting estimates with the possibility that future events may be significantly different fromAudit Committee of our expectations.
Board. We have identifiedbelieve the following sixcritical accounting policies thatestimates require us to make the most difficult, subjective or complex judgments in order to fairly present our consolidated financial position and results of operations.judgments.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for an estimate of the losses we will incur if our customers do not make required payments. We perform periodic credit evaluations of our customers and typically do not require collateral. Consistent with industry practices, we require payment from our customers within 30 days except for sales under early-buyearly buy programs for which we provide extended payment terms to qualified customers. The extended terms require payments in equal installments in April, May and June or May and June, depending on geographical location. In the past, credit losses have been within or better than our expectations.
As our business is seasonal, our customers’ businesses are also seasonal. Sales are lowest in the winter months, and our past due accounts receivable balance as a percentage of total receivables generally increases during this time. We provide reserves for uncollectible accounts based on the accounts receivable aging ranging from 0.12% for amounts currently due up to 100% for specific accounts more than 60 days past due.
13
SCP POOL CORPORATION
Part II.
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At the end of each year, we perform a reserve analysis of all accounts with past due balances greater than $25,000. Additionally, we perform a separate reserve analysis on the balance of our accounts receivables with emphasis on the remainder of the past due portion of the aging. As we review these past due accounts, we evaluate collectibility based on a combination of factors, including:
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During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. Such write-offs are charged against our allowance for doubtful accounts. In the past five years, write-offs have averaged less than 0.2% of net sales.
If the balance of the accounts receivable reserve increased or decreased by 20% at December 31, 2004,2005, pretax income would change by approximately $0.6$0.8 million and earnings per share would change by less thanapproximately $0.01 per diluted share based on the number of diluted shares outstanding at December 31, 2004.2005.
Inventory Obsolescence and Shrink
Product inventories represent the largest asset on our balance sheet. Our goal is to manage our inventory such that we minimize stock-outs to provide the highest level of service to our customers. To do this, we maintain at each service center an adequate inventory of stock keeping units (SKUs) with the highest sales volume. At the same time, we continuously strive to better manage our slower moving classes of inventory, which are not as critical to our customers and thus, inherently have lower velocity. Service centers classify products into 13 classes based on sales at that location over the past 12 months. The table below presents a description of these inventory classes:
| Classes |
| highest sales value items, which represent approximately 80% of net sales at the service center |
Classes |
| lower sales value items, which we keep in stock to provide a high level of customer service |
Class 13 | products with no sales | |
order products not yet delivered to the customer | ||
There is little risk of obsolescence for products in classes 1-31-4 because products in these classes generally turn quickly. We establish our reserve for inventory obsolescence based on inventory classes 5-13, which we believe represent some exposure to inventory obsolescence, with particular emphasis on SKUs with the least sales over the previous 12 months. The reserve is intended to reflect the value of inventory that we may not be able to sell at a profit. We provide a reserve of 5% for inventory in classes 5-13.5-13 as determined at the service center level. We also provide an additional 5% reserve for excess inventory in classes 5-12 and an additional 45% reserve for class 13 inventory. We define excess inventory in class 13. We determine excess inventory, which is defined as the amount of inventory on hand in excess of the previous 12 months usage, on a company-wide basis.
14
SCP POOL CORPORATION
Part II.
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In evaluating the adequacy of our reserve for inventory obsolescence, and shrink at the service center level, we consider a combination of factors including:
the level of inventory in relationship to historical sales by product, including inventory usage by class based on product sales at both the service center and Company levels;
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Our reserve for inventory obsolescence may periodically require adjustment as changes occur in the above-identified factors.
If the balance of our inventory reserve increased or decreased by 20% at December 31, 2004,2005, pretax income would change by approximately $0.6$0.8 million and earnings per share would change by less thanapproximately $0.01 per diluted share based on the number of diluted shares outstanding at December 31, 2004.2005.
Revenue Recognition
We recognize revenue in accordance with SEC Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements, and the appropriate amendments. SAB 101 requires that four basic criteria must be met before we can recognize revenue:
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We record revenue when customers take delivery of products. Customers may pick up products at any service center location, or products may be delivered via our trucks or third party carriers. Products shipped via third party carriers are considered delivered based on the shipping terms, which are generally FOB shipping point.
We may offer volume rebates, which we accrue monthly as an adjustment to net sales. We record customer returns, including those associated with early-buy programs, as an adjustment to net sales. In the past, customer returns have not been material.
Vendor Rebates
We account for vendor rebates in accordance with the Emerging Issues Task Force Issue 02-16,Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.Many of our arrangements with our vendors provide for us to receive a rebate of a specified amount of consideration, payable to us when we achieve any of a number of measures, generally related to the volume level of purchases from our vendors. We account for such rebates as if they are a reduction of the prices of the vendor’s products and therefore as a reduction of inventory until we sell the product, at which time such rebates reduce cost of sales in our income statement. Throughout the year, we estimate the amount of the rebate earned based on our estimate of purchases to date relative to the purchase levels that mark
15
SCP POOL CORPORATION
Part II.
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our progress toward earning the rebates. We continually revise these estimates to reflect actual rebates earned based on actual purchase levels.
If market conditions were to change, vendors may change the terms of some or all of these programs. Although such changes would not affect the amounts we have recorded related to product already purchased, it may lower or raise our gross margins on products we sell or revenues earned in future periods.
Incentive Compensation Accrual
We have an incentive compensation structure designed to attract, motivate and retain employees. Our incentive compensation packages include bonus plans that are specific to each group of eligible participants and their levels and areas of responsibility. The majority of our bonus plans have annual cash payments that are based primarily on objective performance criteria, with a small component based on management’s discretion. We calculate bonuses as a percentage of salaries based on the achievement of certain key measurable financial and operational results, including budgeted operating income and diluted earnings per share. We generally make bonus payments at the end of February following the most recent completed fiscal year.
The objectives for our bonus plans are set at the inception of the bonus plan year using both historical information and forecasted results of operations for the current plan year. We record an incentive compensation accrual as of each month-end using management’s estimate of the total overall incentives earned based on the amount of progress achieved towards the stated bonus plan objectives. During the third and fourth quarters and as of our fiscal year-end, we adjust our estimated incentive compensation accrual based on our detailed analysis of each bonus plan, the participants’ progress toward achievement of their specific bonus plan objectives and management’s estimates related to the discretionary components of the bonus plans. Due to both the discretionary components of the bonus plans and the timing of the approval and payment of the annual bonuses, our estimated quarterly incentive compensation expense and accrual balances may vary relative to actual annual bonus expense and payouts.
Income Taxes
We record deferred tax assets or liabilities based on differences between the financial reporting and tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when we expect the differences to reverse. Due to changing tax laws and state income tax rates, significant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future.
As of December 31, 2004,2005, and in accordance with the provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 109,Accounting for Income Taxes, United States taxes were not provided on undistributed earnings of our foreign subsidiaries, as we have invested or expect to invest the undistributed earnings indefinitely. If in the future these earnings are repatriated to the United States, or if we determine that the earnings will be remitted in the foreseeable future, additional tax provisions may be required.
We hold, through our affiliates, cash balances in the countries in which we operate, including substantial amounts held outside the United States. Most of the amounts held outside the United States could be repatriated to the United States, but, under current law, may be subject to United States federal income taxes, less applicable foreign tax credits. Repatriation of some foreign balances is restricted by local laws including the imposition of withholding taxes in some jurisdictions. We have not provided for the United States federal tax liability on these amounts and for financial statement purposes, these foreign cash balances are considered indefinitely reinvested outside the United States.
The American Jobs Creation Act of 2004 enacted on October 22, 2004 (the Jobs Act), provides provided for a temporary 85% dividends received deduction on certain foreign earnings repatriated during a one-year period. The deduction would result in an approximate 5.25% federal tax rate onDuring the repatriated earnings. To qualify forfourth quarter of 2005, we completed our analysis of the deduction, the earnings must be reinvested in the United States pursuant to a domestic reinvestment plan established by a company’s chief executive officercosts and approved by its boardbenefits of directors. Certain other criteria inrepatriating funds under the Jobs Act must be satisfied as well. The maximum amountand decided not to repatriate any of our foreign earnings, if any, that qualify forearnings. Therefore, there was no impact from the temporary deduction has not been determined. The one-year period during which we may make the qualifying distributions is fiscal 2005.
We are in the process of evaluating whether we have foreign earnings that qualify for the dividend received deduction and whether we will repatriate all or a portion of any qualifying foreign earnings. We have not determined the range of reasonably possible amounts that we may repatriate or an estimaterepatriation provisions of the possible United States federal and state income tax expense related to repatriation. We do not anticipate that the United States federal and state income tax will be material. We expect to determine the amounts and sources of foreign earnings to be repatriated, if any, by the third quarter of fiscal 2005.Jobs Act.
16
SCP POOL CORPORATION
Part II.
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We have operations in 3739 states and sixseven foreign countries. The amount of income taxes we pay is subject to adjustment by the applicable tax authorities. We are currently under examinationsubject to regular audits by federal, state and state incomeforeign tax authorities. Our estimate for the potential outcome forof any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. These adjustments may include differences between the estimated deferred tax liability that we have recorded for equity earnings in unconsolidated investments and the actual taxes paid upon the return of undistributed equity earnings through a manner other than a capital transaction. As a result of these uncertainties, our effective tax rate may fluctuate significantly on a quarterly basis.
Goodwill
Goodwill represents the excess of the amount we paid to acquire a company over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. At December 31, 2004,2005, our goodwill balance was $104.7$139.5 million, representing 22%19% of total assets and 48%51% of stockholders’ equity.
We account for goodwill under the provisions of SFAS 142,Goodwill and Other Intangible Assets. Under these rules, we test goodwill for impairment annually or at any other time when impairment indicators exist.
In October 2004,2005, we performed our annual goodwill impairment test, which requires comparison of our estimated fair value to our book value, including goodwill. In accordance with SFAS 142, we retested goodwill for impairment as of December 31, 2004 after we divested a portion of our goodwill in connection with the divestiture of our manufacturing facilities in Fort Wayne, Indiana and Quebec, Canada. As a result of these tests,this test, we believe the goodwill on our balance sheet is not impaired.
If circumstances change or events occur to indicate that our fair market value has fallen below book value, we will compare the estimated fair value of the goodwill to its book value. If the book value of goodwill exceeds the estimated fair value of goodwill, we will recognize the difference as an impairment loss in operating income.
Results of OperationsRESULTS OF OPERATIONS
The table below summarizes information derived from our Consolidated Statements of Income expressed as a percentage of net sales for the past three fiscal years:
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| Year Ended December 31, |
| Year Ended December 31, | ||||||||||||
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| 2004 |
| 2003 |
| 2002 |
| 2005 | 2004 | 2003 | ||||||
Net sales | Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of sales | Cost of sales | 71.7 |
| 72.7 |
| 74.0 |
| 72.1 | 71.7 | 72.7 | ||||||
| Gross profit | 28.3 |
| 27.3 |
| 26.0 |
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Gross profit | 27.9 | 28.3 | 27.3 | |||||||||||||
Selling and administrative expenses | Selling and administrative expenses | 19.6 |
| 19.6 |
| 18.6 |
| 18.8 | 19.6 | 19.6 | ||||||
| Operating income | 8.7 |
| 7.6 |
| 7.4 |
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Interest expense | 0.3 |
| 0.4 |
| 0.5 |
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Income before income taxes | 8.4 |
| 7.2 |
| 6.9 |
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Operating income | 9.0 | 8.7 | 7.6 | |||||||||||||
Interest expense, net | 0.4 | 0.3 | 0.4 | |||||||||||||
Income before income taxes and equity earnings | 8.6 | 8.4 | 7.2 | |||||||||||||
Note: Due to rounding, percentages may not add to total income before income taxes.
17
SCP POOL CORPORATION
Part II.
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The following discussion of consolidated operating results includes the operating results from acquisitions in 2005, 2004 2003 and 2002.2003. 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.
We calculate base business growth by excludingexclude the following service centers from the calculationbase business for 15 months:
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Additionally, we generally allocate overhead expenses to acquired service centers on the base business by considering base businessbasis of acquired service center net sales as a percentage of total net sales.
Fiscal Year 2005 compared to Fiscal Year 2004
(Unaudited) (In thousands) | Base Business Twelve Months Ended December 31, | Acquired and Divested Twelve Months Ended December 31, | Total Twelve Months Ended December 31, | |||||||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||
Net sales | $ | 1,479,746 | $ | 1,299,399 | $ | 72,913 | $ | 11,454 | $ | 1,552,659 | $ | 1,310,853 | ||||||||||||
Gross profit | 410,721 | 362,786 | 21,727 | 8,048 | 432,448 | 370,834 | ||||||||||||||||||
Gross margin | 27.8 | % | 27.9 | % | 29.8 | % | 70.3 | % | 27.9 | % | 28.3 | % | ||||||||||||
Selling and operating expenses | 270,878 | 248,310 | 21,313 | 8,930 | 292,191 | 257,240 | ||||||||||||||||||
Expenses as a % of net sales | 18.3 | % | 19.1 | % | 29.2 | % | 78.0 | % | 18.8 | % | 19.6 | % | ||||||||||||
Operating income (loss) | 139,843 | 114,476 | 414 | (882 | ) | 140,257 | 113,594 | |||||||||||||||||
Operating income (loss) margin | 9.5 | % | 8.8 | % | 0.6 | % | (7.7 | )% | 9.0 | % | 8.7 | % | ||||||||||||
For purposes of comparing operating results for the year ended December 31, 2005 to the year ended December 31, 2004, 201 service centers were included in the base business calculations and 45 service centers were excluded because they were acquired within the last 15 months. The base business calculation also excludes our North American manufacturing operations that we divested in December 2004. The following service center acquisitions and manufacturing operation divestitures are excluded from the base business calculations for the periods identified:
Acquired / Divested(*) | Acquisition / Divestiture Date | Period Excluded(1) | ||
B&B s.r.l. (Busatta) | October 2005 | November - December 2005 | ||
Direct Replacements, Inc. | October 2005 | November - December 2005 | ||
Horizon Distributors, Inc. | October 2005 | October - December 2005 | ||
Pool Tech Distributors, Inc. | December 2004 | January - December 2005 | ||
Les Industries R.P. Inc.(*) | December 2004 | January - December 2004 | ||
Fort Wayne manufacturing(*) | November 2003 | January - December 2004 | ||
SCP Pool Distributors Spain, S.L. | December 2004 | January 2005 and January 2004 | ||
| (1) | After 15 months of operations, we include acquired service centers in the base business calculation including the comparative prior year period. |
For information about our recent acquisitions, see Note 2 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.
Net Sales
| Year Ended December 31, | ||||||||||||
(in millions) | 2005 | 2004 | Change | |||||||||
Net sales | $ | 1,552.7 | $ | 1,310.9 | $ | 241.8 | 18 | % | ||||
Base business growth of 14% contributed to the increase in net sales, primarily due to the following:
New product initiatives continue to be focused on our complementary products category, for which sales have grown from $3.0 million in 1999 to over $140.0 million in 2005, excluding Horizon. In 2005, complementary product sales grew 32% over 2004. These products, which our customers historically purchased from other suppliers, carry gross margins comparable to our traditional product categories.
The remaining increase in net sales is attributable to acquired service centers, including the Horizon branches acquired in October 2005. Including Horizon’s fourth quarter 2005 sales, complementary products sales grew 76% over 2004 and accounted for 12% of total revenues for the full year 2005.
Gross Profit
| Year Ended December 31, | |||||||||||||||
(in millions) | 2005 | 2004 | Change | ||||||||||||
Gross profit | $ | 432.4 | $ | 370.8 | $ | 61.6 | 17 | % | |||||||
Gross margin | 27.9 | % | 28.3 | % | (0.4 | )% | |||||||||
Base business gross profit growth of 13% contributed $47.9 million to the increase in 2005, while acquired service centers accounted for the remaining increase.
Gross margin decreased to 27.9% in 2005 primarily due to a decrease of approximately 40 basis points related to the disposition of our North American manufacturing assets in December 2004. We also had a slight decrease in gross margin due to the impact of certain product price increases. Supplier price increases were much more pronounced in 2005 than in prior years due to significant price increases on certain chemicals used in the pool industry, as well as increases in underlying commodity costs, particularly oil and steel. In certain product categories, we were only able to pass along price increases on a dollar per unit basis rather than a percentage basis due to competitive pressures. The overall decrease in gross margin was partially offset by improvements achieved through our focus on supply chain management and a shift in product mix to our higher margin products, most notably in the fourth quarter.
Operating Expenses
| Year Ended December 31, | |||||||||||||||
(in millions) | 2005 | 2004 | Change | ||||||||||||
Operating expenses | $ | 292.2 | $ | 257.2 | $ | 35.0 | 14 | % | |||||||
Operating expenses as a percent of net sales | 18.8 | % | 19.6 | % | (0.8 | )% | |||||||||
Operating expenses as a percent of net sales decreased 80 basis points in 2005 as increases in employee related costs and freight expenses were offset by our ability to leverage much of our existing distribution infrastructure and personnel base to support our sales growth.
Interest Expense
Net interest expense increased to $6.4 million in 2005 from $3.9 million 2004 as a result of an increase in the effective interest rate to 4.3% in 2005 from 2.5% in 2004 and a 21% increase in the average debt outstanding. The increase in the interest rate and higher average debt outstanding was partially offset by a $0.3 million decrease in the amortization of deferred financing fees.
Income Taxes
Income taxes increased to $51.7 million in 2005 from $42.8 million in 2004 primarily due to the $24.1 million increase in income before income taxes. Our effective income tax rate decreased from 39% at December 31, 2004 to 38.6% at December 31, 2005. This decrease is due to the anticipated impact of certain tax advantaged business strategies.
Net Income and Earnings Per Share
Net income increased 25% to $83.6 million in 2005 from $66.9 million in 2004. This amount included $1.5 million of net equity earnings from our investment in LAC, which reflects a $0.9 million tax adjustment recorded in the fourth quarter. Diluted earnings per share increased 26% to $1.50 per share in 2005 from $1.19 per share in 2004.
Fiscal Year 2004 compared to Fiscal Year 2003
(Unaudited) |
| Base Business | Acquired and Consolidated |
| Total | |||||||||
(In thousands) |
| Twelve Months | Twelve Months |
| Twelve Months | |||||||||
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| Ended | Ended |
| Ended | |||||||||
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| December 31, | December 31, |
| December 31, | |||||||||
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| 2004 |
| 2003 |
| 2004 |
| 2003 |
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| 2004 |
| 2003 |
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Net sales | $ | 1,254,907 | $ | 1,138,133 | $ | 55,946 | $ | 17,699 |
| $ | 1,310,853 | $ | 1,155,832 |
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Gross profit |
| 356,555 |
| 309,909 |
| 14,279 |
| 5,229 |
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| 370,834 |
| 315,138 |
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Gross margin |
| 28.4 | % | 27.2 | % | 25.5 | % | 29.5 | % |
| 28.3 | % | 27.3 | % |
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Selling and operating expenses |
| 240,943 |
| 219,554 |
| 16,297 |
| 7,558 |
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| 257,240 |
| 227,112 |
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Expenses as a % of net sales |
| 19.2 | % | 19.3 | % | 29.1 | % | 42.7 | % |
| 19.6 | % | 19.6 | % |
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Operating income (loss) |
| 115,612 |
| 90,355 |
| (2,018) |
| (2,329) |
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| 113,594 |
| 88,026 |
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Operating income (loss) margin |
| 9.2 | % | 7.9 | % | (3.6) | % | (13.2) | % |
| 8.7 | % | 7.6 | % |
(Unaudited) (In thousands) | Base Business Twelve Months Ended December 31, | Acquired and Consolidated December 31, | Total Twelve Months Ended December 31, | |||||||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
Net sales | $ | 1,254,907 | $ | 1,138,133 | $ | 55,946 | $ | 17,699 | $ | 1,310,853 | $ | 1,155,832 | ||||||||||||
Gross profit | 356,555 | 309,909 | 14,279 | 5,229 | 370,834 | 315,138 | ||||||||||||||||||
Gross margin | 28.4 | % | 27.2 | % | 25.5 | % | 29.5 | % | 28.3 | % | 27.3 | % | ||||||||||||
Selling and operating expenses | 240,943 | 219,554 | 16,297 | 7,558 | 257,240 | 227,112 | ||||||||||||||||||
Expenses as a % of net sales | 19.2 | % | 19.3 | % | 29.1 | % | 42.7 | % | 19.6 | % | 19.6 | % | ||||||||||||
Operating income (loss) | 115,612 | 90,355 | (2,018 | ) | (2,329 | ) | 113,594 | 88,026 | ||||||||||||||||
Operating income (loss) margin | 9.2 | % | 7.9 | % | (3.6 | )% | (13.2 | )% | 8.7 | % | 7.6 | % | ||||||||||||
For purposes of comparing operating results for the year ended December 31, 2004 to the year ended December 31, 2003, 195 service centers were included in the base business calculations and six service centers were excluded because they were acquired within the last 15 months.
18
SCP POOL CORPORATION
Part II.
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The effect offollowing service center acquisitions and service centers consolidations inare excluded from the table above includesbase business calculations for the operations of the following:periods identified:
Service centers consolidated with Fort Wayne locations – January and February 2003 and January and February 2004
| Date of Acquisition / Consolidation | Period Excluded(1) | ||||
Service centers consolidated with Fort Wayne locations | December 2002 | January – February 2003 and January – February 2004 | ||||
Les Industries R.P. | May 2003 | May – July 2003 and January | ||||
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SCP Mexico S.A. de C.V. | August 2003 | August – October 2003 and January | ||||
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Sud Ouest Filtration | August 2003 | August – October 2003 and January – October 2004 | ||||
| Distribution division of Litehouse Products | October 2003 | October 2003 – December 2004 | ||
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SCP Pool Distributors Spain, S.L. | November 2003 | November 2003 - December 2004 | |||
| (1) | After 15 months of operations, we include acquired service centers in the base business calculation including the comparative prior year period. |
Net Sales
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| Twelve Months Ended December 31, |
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(in millions) |
| 2004 |
| 2003 |
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| Change |
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Net sales | $ | 1,310.9 | $ | 1,155.8 |
| $ | 155.1 | 13 | % |
| Year Ended December 31, | ||||||||||||
| (in millions) | 2004 | 2003 | Change | |||||||||
Net sales | $ | 1,310.9 | $ | 1,155.8 | $ | 155.1 | 13 | % | ||||
Base business growth of 10% contributed $116.8 million to the increase, while acquired service centers and service centers consolidated with acquired locations accounted for the remaining increase. Base business net sales increased primarily due to the following:
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We expect these above mentioned factors will continue to have
Gross Profit
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| Twelve Months Ended December 31, |
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(in millions) |
| 2004 |
| 2003 |
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| Change |
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Gross profit | $ | 370.8 | $ | 315.1 |
| $ | 55.7 | 18 | % |
Gross profit as a percent of net sales |
| 28.3 | % | 27.3 | % |
| 1.0 | % |
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| Year Ended December 31, | |||||||||||||||
| (in millions) | 2004 | 2003 | Change | ||||||||||||
Gross profit | $ | 370.8 | $ | 315.1 | $ | 55.7 | 18 | % | |||||||
Gross margin | 28.3 | % | 27.3 | % | 1.0 | % | |||||||||
Base business gross profit growth of 15% contributed $46.6 million to the increase in 2004, while acquired service centers and service centers consolidated with acquired locations accounted for the remaining increase. The base
19
business gross profit growth is primarily due to the growth in base business net sales as discussed above and growth in our gross profit margins.
Base business gross profit as a percentage of net sales (gross margin)margin improved to 28.4% in 2004 from 27.2% in 2003due primarily due to improved selling and supply chain management practices.
Operating Expenses
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SCP POOL CORPORATION
Part II.
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Going forward, we expect to continue to increase our focus on supply chain management, including expansion of international sourcing and private labeling opportunities, particularly where margin expansion opportunities exist.
Operating Expenses
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| Twelve Months Ended December 31, |
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(in millions) |
| 2004 |
| 2003 |
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| Change |
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Operating expenses | $ | 257.2 | $ | 227.1 |
| $ | 30.1 | 13 | % |
Operating expenses as a percent of net sales |
| 19.6 | % | 19.6 | % |
| — | % |
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| Year Ended December 31, | |||||||||||||||
| (in millions) | 2004 | 2003 | Change | ||||||||||||
Operating expenses | $ | 257.2 | $ | 227.1 | $ | 30.1 | 13 | % | |||||||
Operating expenses as a percent of net sales | 19.6 | % | 19.6 | % | — | % | |||||||||
Operating expenses relating to the base business contributed $21.4 million to the increase in 2004 in order to support increased sales activity, while acquired service centers and service centers consolidated with acquired locations accounted for the remaining increase.
Base business operating expenses as a percentage of net sales decreased slightly to 19.2% in the 2004 from 19.3% in 2003.
Interest Expense
InterestNet interest expense decreased to $3.9 million in 2004 from $4.7 million 2003 as a result of lower average outstanding debt in 2004 compared to 2003, a decline in the effective interest rate to 2.5% in 2004 from 2.6% in 2003 and a decrease of $0.5 million in amortization expense related to capitalized finance costs.
Income Taxes
Income taxes increased to $42.8 million in 2004 from $32.5 million in 2003 primarily due to the $26.4 million increase in income before income taxes. Our effective income tax rate remained unchanged at 39% at December 31,2004 and December 31,2003.
Net Income and Earnings Per Share
Net income increased 32% to $66.9 million in 2004 from $50.8 million while diluted earnings per share increased 31% to $1.19 per share in 2004 from $0.91 per share.
Given our expectations regarding our ability to grow our revenues and to continue to drive additional supply chain and other business improvements, we expect our earnings per share to grow in the range of 15%-18% in 2005.
21
SCP POOL CORPORATION
Part II.
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2003 compared to 2002
(Unaudited) |
| Base Business | Acquired and Consolidated |
| Total |
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(In thousands) |
| Year Ended | Year Ended |
| Year Ended |
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| December 31, | December 31, |
| December 31, |
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| 2003 |
| 2002 |
| 2003 |
| 2002 |
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| 2003 |
| 2002 |
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Net sales | $ | 1,003,403 | $ | 900,988 | $ | 152,429 | $ | 82,258 |
| $ | 1,155,832 | $ | 983,246 |
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Gross profit |
| 266,686 |
| 236,781 |
| 48,452 |
| 18,751 |
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| 315,138 |
| 255,532 |
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Gross margin |
| 26.6 | % | 26.3 | % | 31.8 | % | 22.8 | % |
| 27.3 | % | 26.0 | % | |
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Selling and operating expenses |
| 186,820 |
| 164,596 |
| 40,292 |
| 18,249 |
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| 227,112 |
| 182,845 |
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Expenses as a % of net sales |
| 18.6 | % | 18.3 | % | 26.4 | % | 22.2 | % |
| 19.6 | % | 18.6 | % | |
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Operating income |
| 79,866 |
| 72,185 |
| 8,160 |
| 502 |
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| 88,026 |
| 72,687 |
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Operating income margin |
| 8.0 | % | 8.0 | % | 5.4 | % | 0.6 | % |
| 7.6 | % | 7.4 | % | |
For purposes of comparing operating results for the year ended December 31, 2003 to the year ended December 31, 2002, 178 service centers were included in the base business calculations. Of the excluded service centers, six were acquired within the last 15 months and 13 were existing service centers that were consolidated with acquired locations within the last 15 months.
The effect of service center acquisitions and consolidations in the table above includes the operations of the following:
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Net Sales
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| Twelve Months Ended December 31, |
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(in millions) |
| 2003 |
| 2002 |
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| Change |
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Net sales | $ | 1,155.8 | $ | 983.2 |
| $ | 172.6 | 18 | % |
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SCP POOL CORPORATION
Part II.
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Base business growth of 11% contributed $102.4 million to the increase, while acquired service centers and service centers consolidated with acquired locations accounted for the remaining increase. Base business net sales increased primarily due to the following:
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Gross Profit
|
| Twelve Months Ended December 31, |
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(in millions) |
| 2003 |
| 2002 |
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| Change |
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Gross profit | $ | 315.1 | $ | 255.5 |
| $ | 59.6 | 23 | % |
Gross profit as a percent of net sales |
| 27.3 | % | 26.0 | % |
| 1.3 | % |
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Base business gross profit growth of 13% contributed $29.9 million to the increase, while acquired service centers and service centers consolidated with acquired locations accounted for the remaining increase.
Base business gross margin increased 30 basis points to 26.6% in 2003 from 26.3% in 2002 primarily due to improved selling and purchasing practices. The remaining increase in gross margin is attributable to the business acquired in our August 2002 Fort Wayne acquisition, including the retention of margins from the manufacturing business.
Operating Expenses
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| Twelve Months Ended December 31, |
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(in millions) |
| 2003 |
| 2002 |
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| Change |
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Operating expenses | $ | 227.1 | $ | 182.8 |
| $ | 44.3 | 24 | % |
Operating expenses as a percent of net sales |
| 19.6 | % | 18.6 | % |
| 1.0 | % |
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Operating expenses relating to the base business contributed $22.2 million to the increase, while acquired service centers and locations consolidated with acquired service centers accounted for the remaining increase. Base business operating expenses as a percentage of net sales increased to 18.6% in 2003 from 18.3% in 2002. The increase in base business operating expenses is primarily due to our continued investment in our sales and marketing programs.
Interest Expense
Interest expense decreased $0.3 million to $4.7 million in 2003 from $5.0 million in 2002. Although average debt outstanding was higher in 2003, our effective interest rate decreased to 2.6% in 2003 from 3.7% in 2002, primarily due to an accounts receivable securitization facility we instituted in the first quarter of 2003, which provides us with a lower cost form of financing.
Income Taxes
23
Income taxes increased $6.1 million to $32.5 million for 2003 compared to $26.4 million for 2002, primarily due to the $15.6 million increase in income before income taxes. Our effective income tax rate remained unchanged at 39% throughout 2002 and 2003.
24
SCP POOL CORPORATION
Part II.
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Seasonality and Quarterly Fluctuations
Our business is highly seasonal, and weather is the principal external factor affecting our business. The table below presents some of the possible effects resulting from various weather conditions:
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For example, in 2004, we believe our operating results were impacted by the less than favorable weather conditions throughout much of the United States. Although we experienced favorable weather conditions in the western portion of the United States, much of the central and northeastern regions experienced unusually cold and wet conditions in the peak summer season, which adversely impacted our business.
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.installation and landscape installations and maintenance. Sales are substantially lower during the first and fourth quarters when we may incur net losses.
In 2004,2005, approximately 66%64% of our net sales and 89% of our operating income were generated in the second and third quarters of the year, and approximately 96% of operating income was generated in that same period.year.
We typically experience a build-up of product inventories and accounts payable during the winter months in anticipation of the peak selling season. Excluding borrowings to finance acquisitions and share repurchases, our peak borrowing usually occurs during the second quarter, primarily because extended payment terms offered by our suppliers typically are payable in April, May and June, while our peak accounts receivable collections typically occur in June, July and August.
The following table presents certain unaudited quarterly data for 2005 and 2004. We have included income statement and balance sheet data for the most recent eight quarters to allow for a meaningful comparison of the seasonal fluctuations in these amounts. In our opinion, this information reflects all normal and recurring adjustments considered necessary for a fair presentation of this data. Due to the seasonal nature of the swimming pool industry, the results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing trends.
| (Unaudited) | QUARTER | |||||||||||||||||||||||||||||||
| (in thousands) | 2005 | 2004 | ||||||||||||||||||||||||||||||
| First | Second | Third | Fourth | First | Second | Third | Fourth | |||||||||||||||||||||||||
Statement of Income Data | ||||||||||||||||||||||||||||||||
Net sales | $ | 265,161 | $ | 563,978 | $ | 423,729 | $ | 299,791 | $ | 234,648 | $ | 504,177 | $ | 362,091 | $ | 209,937 | ||||||||||||||||
Gross profit | 71,951 | 162,681 | 114,605 | 83,211 | 65,032 | 145,215 | 104,183 | 56,404 | ||||||||||||||||||||||||
Operating income (loss) | 11,301 | 82,795 | 42,393 | 3,768 | 7,672 | 72,589 | 36,949 | (3,616 | ) | |||||||||||||||||||||||
Net income (loss) | 4,753 | 51,640 | 27,120 | 108 | 4,080 | 43,595 | 22,010 | (2,744 | ) | |||||||||||||||||||||||
Net sales as a % of annual net sales | 17 | % | 37 | % | 27 | % | 19 | % | 18 | % | 38 | % | 28 | % | 16 | % | ||||||||||||||||
Gross profit as a % of annual gross profit | 17 | % | 38 | % | 26 | % | 19 | % | 18 | % | 39 | % | 28 | % | 15 | % | ||||||||||||||||
Operating income (loss) as a % of annual operating income | 8 | % | 59 | % | 30 | % | 3 | % | 7 | % | 64 | % | 32 | % | (3 | )% | ||||||||||||||||
Balance Sheet Data | ||||||||||||||||||||||||||||||||
Total receivables, net | $ | 164,507 | $ | 231,736 | $ | 152,037 | $ | 141,785 | $ | 147,097 | $ | 197,683 | $ | 130,360 | $ | 97,589 | ||||||||||||||||
Product inventories, net | 281,267 | 247,350 | 197,135 | 330,575 | 241,903 | 219,711 | 167,024 | 195,787 | ||||||||||||||||||||||||
Accounts payable | 219,290 | 165,872 | 99,920 | 174,170 | 166,305 | 144,029 | 76,454 | 113,114 | ||||||||||||||||||||||||
Total debt | 145,045 | 174,743 | 86,922 | 198,241 | 152,181 | 161,766 | 102,197 | 97,505 | ||||||||||||||||||||||||
25
SCP POOL CORPORATION
Part II.
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In the fourth quarter 2005, our results of operations include the 40 Horizon service centers that we acquired in October 2005. 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 service centers. We attempt to open new service centers at the end of the fourth quarter or the first quarter of the subsequent year to take advantage of preseason sales programs and the following peak selling season.
Weather is the principal external factor affecting our business. The following table below presents certain unaudited quarterly data for 2004 and 2003. 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 (primarily in the northern half of the US) | • A longer pool and landscape season, thus increasing our sales | |
Unseasonably late warming trends (primarily in the northern half of the US) | • A shorter pool and landscape season, thus decreasing our sales | |
In 2005, our opinion, this information reflects all normal and recurring adjustments considered necessary forsales were negatively impacted by a fair presentation of this data. Duelate start to the seasonal naturepool season in northern markets due to less than favorable weather throughout much of the swimmingfirst quarter. This decrease in sales was partially off-set by increased sales attributable to above average temperatures during the fourth quarter of 2005, which helped to extend the pool industry, the results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing trends.
(Unaudited) |
| QUARTER |
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(in thousands) |
| 2004 | 2003 | |||||||||||||||
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| Second |
| Third |
| Fourth |
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| Second |
| Third |
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Net sales | $ | 234,648 |
| 504,177 |
| 362,091 |
| 209,937 | $ | 196,388 | $ | 431,885 | $ | 337,611 | $ | 189,948 |
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Gross profit |
| 65,032 |
| 145,215 |
| 104,183 |
| 56,404 |
| 52,523 |
| 120,862 |
| 92,157 |
| 49,596 |
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Operating income (loss) |
| 7,672 |
| 72,589 |
| 36,949 |
| (3,616) |
| 3,520 |
| 57,189 |
| 31,220 |
| (3,903) |
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Net sales as a % of annual net sales |
| 18 | % | 38 | % | 28 | % | 16 | % | 17 | % | 37 | % | 29 | % | 17 | % | |
Gross profit as a % of annual |
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| 18 | % | 39 | % | 28 | % | 15 | % | 17 | % | 38 | % | 29 | % | 16 | % |
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| 7 | % | 64 | % | 32 | % | (3) | % | 4 | % | 65 | % | 35 | % | (4) | % |
season in certain markets.
Liquidity and Capital ResourcesLIQUIDITY AND CAPITAL RESOURCES
Liquidity is defined as the ability to generate adequate amounts of cash to meet current 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:
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26
SCP POOL CORPORATION
Part II.
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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. Borrowings, togetherborrowings, which combined with cash from operations and seller financing have historically have been sufficient to support our growth and finance our acquisitions. The same principle applies for funds used for share repurchases and capital expenditures. Our priorities for the use of cash are as follows:
Sources and Uses of Cash Our 2005 cash from operations was $38.1 million, or 46% of net income, compared to net cash provided by operations of $56.4 million in 2004. The decrease in cash from operations in 2005 is primarily a result of our participation in vendor early payment incentives for early buy purchases received and paid for in the fourth quarter, partially offset by the deferral of our third and fourth quarter 2005 estimated federal tax payments and higher net income. In 2005, cash used in investing activities included $85.7 million for our acquisition of Horizon in the fourth quarter of 2005. Our financing activities included $119.5 million of net proceeds from debt and the issuance of common stock under stock option plans, offset by $32.1 million of share repurchases and $17.9 million for the payment of our quarterly cash dividend to shareholders, which we increased in the second quarter of 2005. The impact of our common stock repurchases reduced diluted weighted average shares outstanding by approximately 0.3 million shares for the year ended December 31, 2005. Future Sources and Uses of Cash |
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On November 2, 2004,December 20, 2005, we entered into anamended our unsecured syndicated senior credit facility (the Credit Facility) with a group of banks. This Credit Facility replaced our previous senior secured credit facility dated November 27, 2001.to provide for additional borrowing capacity. The amended Credit Facility, which matures on November 2, 2009,December 20, 2010, provides for a $120.0 million five-year revolving credit facility which(the Revolver) and a $60.0 million term loan (the Term Loan). The Credit Facility includes sublimits for the issuance of swingline loans and standby letters of credit. The aggregate maximum principal amount of the commitments under the Credit Facility may be increased from time to time by a total amount up to $40.0 million.
During the twelve months ended December 31, 2004, we received net proceeds of $11.5 million on the Credit Facility. At December 31, 2004,2005, there was $50.4$69.1 million outstanding and $68.4$49.2 million available for borrowing under the Credit Facility.Revolver. The average effective interest rate ofon the Credit FacilityRevolver was approximately 3.2%4.5% for the year ended December 31, 2004.
Our obligations under2005. For additional information regarding the Credit Facility, are guaranteed by allsee Note 5 of our existing and future direct and indirect subsidiaries. Borrowings and standby letters of credit under the Credit Facility bear interest, at our option, at either (a) a base rate, which is the greater of (i) the Wachovia Bank, National Association prime rate or (ii) the overnight Federal Funds Rate plus 0.50%, or (b) the London Interbank Offered Rate (LIBOR) plus a spread ranging from 0.600%“Notes to 1.25%, with such spreadConsolidated Financial Statements,” included in each case depending on our leverage ratio. We are also required to pay (a) an annual facility fee of 0.150% to 0.250%, with such spread in each case depending on our leverage ratio, (b) an annual commercial letter of credit issuance fee of 0.125% multiplied by the face amount of each letter of credit and (c) a letter of credit commission of 0.150% to 0.250% multiplied by face amount of each letter of credit, with such spread in each case depending on our leverage ratio.
The Credit Facility contains terms and provisions (including representations, covenants and conditions) customary for transactionsItem 8 of this type. Financial covenants include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio. Other covenants include restrictions on our ability to, among other things, pay dividends or make other capital distributions (other than in accordance with our current dividend policy).Form 10-K.
The Credit Facility contains customary events of default. If an event of default occurs and is continuing under the Credit Facility, the lenders may terminate their obligations thereunder and may require us to repay all amounts thereunder. As of December 31, 2004,In March 2005, we were in compliance with all covenants and financial ratio requirements.
27
SCP POOL CORPORATION
Part II.
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At December 31, 2004, we had outstanding borrowings of $42.6 million underrenewed our accounts receivable securitization facility (the Receivables Facility). In the first quarter of 2004, we renewed the Receivables Facility,, which hasprovides a seasonal borrowing capacity of up to $100.0 million, through March 2005.2006. The Receivables Facility provides for the true sale of certain of our receivables as they are created to a wholly-owned,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 sheet. We employed this arrangement because it provides us with a lower cost form of financing. At December 31, 2004,2005, there was $65.7 million outstanding under the Receivables Facility at an average effective interest rate of the Receivables Facility was approximately 2.0%4.0%.
At December 31, 2004,On February 17, 2006, $50.0 million remained available under the authorization of our contractual obligationsBoard of long-term debt and operating leases were as follows (in thousands):
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| 1 year |
| 1-2 years |
| 3-4 years |
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Long-term debt | $ | 54,910 | $ | 1,350 | $ | 1,350 | $ | 1,790 | $ | 50,420 |
Short-term financing |
| 42,595 |
| 42,595 |
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Operating leases |
| 98,799 |
| 25,908 |
| 22,815 |
| 28,871 |
| 21,205 |
| $ | 196,304 | $ | 69,853 | $ | 24,165 | $ | 30,661 | $ | 71,625 |
Net cash provided by operating activities was $56.0 million, or 84% of net income, comparedDirectors for future share repurchases. We intend to net cash provided by operations of $78.1 million in 2003. In 2004, we continuedcontinue to secure better vendor terms reducing our average days payable outstanding by eight days and increasing terms discounts by $1.1 million.
In 2003, net cash provided by operating activities increased $19.9 millionrepurchase shares on the open market from time to $78.1 million from $58.2 million in 2002. This increase is due to an increase in net income and improved working capital management as we continued to better manage our inventory, and generally improved disciplinetime, depending on working capital. Additionally, we realized the cash benefit from the consolidation/closing of 14 service centers acquired in the Fort Wayne Pools transaction.
Initially, acquisitions are financed through increased bank borrowings, and those borrowings are then reduced withmarket conditions. We may use cash flows from operations. The same principle appliesoperations to fund these purchases, or we may incur additional debt.
In the third quarter of 2006, our cash flows will be negatively impacted by payment of our third and fourth quarter 2005 estimated federal tax payments that have been deferred as allowed by the Katrina Emergency Tax Relief Act of 2005 (the Act). These payments, which were originally deferred until February 2006 under the Act, will now be due in August 2006, as the Internal Revenue Service has postponed the payment deadline for funds used for share repurchases and capital expenditures.affected taxpayers.
We believe we have adequate availability of capital to fund present operations and anticipated growth, including expansion in existing and targeted market areas. We continually evaluate potential acquisitions and hold discussions with acquisition candidates. If suitable acquisition opportunities or working capital needs arise that would require additional financing, we believe that our financial position and earnings history provide a solid base for obtaining additional financing resources at competitive rates and terms. Additionally, we may issue common or preferred stock to raise funds.
28
SCP POOL CORPORATIONContractual Obligations
Part II.
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Accounts Receivable and the Allowance for Doubtful Accounts
Accounts receivable increased $13.8 million, or 16%, to $97.6 million at December 31, 2004, compared to $83.8 million at December 31, 2003. This increase is consistent with the increase in net sales between years.
The allowance for doubtful accounts decreased to $3.1 million at December 31, 2004 from $3.8 million at December 31, 2003. The allowance represented 51% of the accounts receivable greater than 60 days past due in December 2004 compared to 54% in December 2003.
Product Inventories and the Reserve for Shrink and Obsolescence
Product inventories increased $1.9 million, or 1%, to $195.8 million at December 31, 2004 from $193.9 million at December 31, 2003.
At December 31, 2004, the inventory reserve of $3.1 million was unchanged from the prior year. The slowest moving class of inventory decreased approximately $0.1 million from 2003 to 2004.
Share Repurchase Program
As part of2005, our share repurchase program, in 2004 we purchased 1.6 million shares of our common stock at an average price of $26.03 per share. We subsequently canceled these shares.
The impact of our common stock repurchases had the effect of reducing diluted weighted average shares outstanding by approximately 0.7 million sharescontractual obligations for the year ended December 31, 2004.
On February 14, 2005, $27.4 million remained available under the authorization of our Board of Directors for future share repurchases. We intend to continue to repurchase shares on the open market from time to time, depending on market conditions. We may use cash flows from operations to fund these purchases, or we may incur additional debt.
long-term debt and operating leases were as follows (in thousands):
29
SCP POOL CORPORATION
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. 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.
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:
We are susceptible to adverse weather conditions.
Weather is the principal external factor affecting our business. For example, unseasonably late warming trends can decrease the length of the pool season and unseasonably cool weather or extraordinary rainfall during the peak season can decrease swimming pool use, installation and maintenance, which adversely affects sales of our products.
Our business is highly seasonal.
In 2004, approximately 66% of our net sales were generated in the second and third quarters of the year, which represent the peak months of swimming pool use, installation, remodeling and repair, and 96% of our operating income was generated in the same period. Our sales are substantially lower during the first and fourth quarters of the year, when we may incur net losses.
We face intense competition both from other leisure product alternatives and from within the pool industry.
We face competition from both outside our industry with sellers of other leisure product alternatives, such as boats and motor homes, and from within our industry with various regional and local distributors and, to a lesser extent, mass market retailers and large pool supply retailers. 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 51% of our net sales in 2004, also tend to be more competitive than others.
More aggressive competition by mass merchants 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 the pool industry. Historically, mass market retailers have generally expanded by adding new stores and product breadth, but their product offering of pool related products has remained relatively constant. Should mass market retailers increase their focus on the pool industry or increase the breadth of their pool related product offerings and become a more significant competitor for direct and end-use customers, this could have an adverse impact on our business.
30
SCP POOL CORPORATION
Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995 (continued)
The demand for our swimming pool and leisure related products may be adversely affected by economic downturns.
In economic downturns, the demand for swimming pool or leisure related products may decline as discretionary consumer spending, the increase in pool eligible households and swimming pool construction decline. Although maintenance products and repair and replacement equipment that must be purchased by pool owners to maintain existing swimming pools account for more than 60% of our gross profits, the growth of our business depends on the expansion of the installed pool base, which may be viewed by most consumers as a discretionary expenditure that may be adversely affected by economic downturns.
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 pool chemicals and other products. For example, we sell algaecides that are regulated as pesticides under the Federal Insecticide, Fungicide and Rodenticide Act and state pesticide laws, which primarily relate to labeling and annual registration.
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 increased 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 to plan accordingly in order to remain in compliance with changing regulations and to minimize the costs of such compliance.
We store chemicals and other combustible materials that involve fire, safety and casualty risks.
We store chemicals, including certain combustible, oxidizing compounds, at our service 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 we will be able to maintain adequate insurance in the future at rates we consider reasonable or that our insurance coverage will be adequate to cover future claims that may arise. 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.
31
SCP POOL CORPORATION
Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995 (continued)
We may not be able to sustain our pace of growth.
We have experienced substantial sales growth in recent years through acquisitions and the opening of new locations that have increased our size, scope and geographic distribution. Since 2000, we have opened 28 new service centers and have completed 12 acquisitions, consisting of 74 service centers (net of service center closings and consolidations). While we contemplate continued growth through acquisitions and internal expansion, no assurance can be made as to our ability to:
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If we do not manage these potential difficulties successfully, our operating results could be adversely affected.
We depend on key personnel.
Our future success depends to an extent upon the continued service of Manuel Perez de la Mesa, our Chief Executive Officer, and to a lesser degree, our other executive officers and key management personnel, and on our ability to continue to attract, retain and motivate qualified personnel. 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.
Our distribution business is highly dependent on our ability to maintain favorable relationships with suppliers and manufacturers.
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 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 Waterpik Technologies, Inc., which accounted for approximately 16%, 9% and 7%, respectively, of the costs of products we sold in 2004. While we do not believe that the loss of any single supplier would adversely affect our business, 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. We dedicate significant resources promoting the benefits and affordability of pool ownership, which we believe greatly benefits our customers and suppliers.
32
SCP POOL CORPORATION
Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995 (continued)
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 an 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.
A terrorist attack or the threat of a terrorist attack could have a material adverse effect on our business.
The terrorist attacks that took place on September 11, 2001, in the U.S. were unprecedented events that have created many economic and political uncertainties, some of which may materially impact our business. Discretionary spending on leisure products such as ours is generally adversely affected during times of economic uncertainty. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties, which could adversely affect our business for the short or long-term in ways that cannot presently be predicted.
33
SCP POOL CORPORATION
| Total | Payments due by period | ||||||||||||||
| Less than 1 year | 1-2 years | 3-4 years | 5 years and thereafter | ||||||||||||
Long-term debt | $ | 132,584 | $ | 1,350 | $ | 7,790 | $ | 54,000 | $ | 69,444 | |||||
Short-term financing | 65,657 | 65,657 | — | — | — | ||||||||||
Operating leases | 117,180 | 29,922 | 45,007 | 25,129 | 17,122 | ||||||||||
| $ | 315,421 | $ | 96,929 | $ | 52,797 | $ | 79,129 | $ | 86,566 | ||||||
Item 7A. Quantitative and Qualitative Disclosures about Market Risk |
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We are exposed to market risks, including interest rate risk and foreign currency risk. The adverse effects of potential changes in these market risks are discussed below. The following discussion does not consider the effects of the reduced level of overall economic activity that could exist following such changes. Further, in the event of changes of such magnitude, we would likely take actions to mitigate our exposure to such changes.
Interest Rate Risk
Our earnings are exposed to changes in short-term interest rates because of the variable interest rates on our debt. If (i) the variable rates on our Credit Facility and our Receivables Facility increased or decreased 1.0% from the rate at December 31, 2004;2005; and (ii) we borrowed the maximum amount available under the Credit Facility ($120220.0 million) and the Receivables Facility ($100100.0 million) for all of 2005,2006, then our pretax income would change by approximately $2.2$2.6 million and earnings per share would change by $0.02$0.03 per diluted share based on the number of weighed average diluted shares outstanding at December 31, 2004. 2005.
The fair value of our Credit FacilityRevolver is not affected by changes in market interest rates. In December 2005, we entered into an interest rate swap agreement to reduce our exposure to fluctuations in interest rates on our Term Loan. The swap will be in effect as of June 30, 2006 and terminate on December 31, 2008.
Foreign Exchange Risk
We have wholly-ownedwholly owned subsidiaries in Canada, Mexico, the United Kingdom, France, Portugal, Spain and Spain.Italy. In the past, we have not hedged our foreign currency exposure, and fluctuations in exchange rates have not materially affected our operating results. Future changes in exchange rates may positively or negatively impact our revenues, operating expenses and earnings. Due to the size of our foreign operations, however, we do not anticipate that exposure to foreign currency rate fluctuations will be material in 2005.2006.
Functional Currencies | ||
Canada | Canadian Dollar | |
Mexico | Peso | |
United Kingdom | British Pound | |
France | Euro | |
Portugal | Euro | |
Spain | Euro | |
Italy | Euro | |
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See the attached Consolidated Financial Statements and related Notes (pages F-1 through F-28).Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Not applicable.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of SCP Pool Corporation
We have audited the accompanying consolidated balance sheets of SCP Pool Corporation as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SCP Pool Corporation at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New Orleans, Louisiana
March 3, 2006
Consolidated Statements of Income
(In thousands, except share data)
| Year Ended December 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
Net sales | $ | 1,552,659 | $ | 1,310,853 | $ | 1,155,832 | |||
Cost of sales | 1,120,211 | 940,019 | 840,694 | ||||||
Gross profit | 432,448 | 370,834 | 315,138 | ||||||
Selling and administrative expenses | 292,191 | 257,240 | 227,112 | ||||||
Operating income | 140,257 | 113,594 | 88,026 | ||||||
Interest expense, net | 6,434 | 3,855 | 4,669 | ||||||
Income before income taxes and equity earnings | 133,823 | 109,739 | 83,357 | ||||||
Provision for income taxes | 51,669 | 42,798 | 32,509 | ||||||
Equity earnings in unconsolidated investments, net | 1,467 | — | — | ||||||
Net income | $ | 83,621 | $ | 66,941 | $ | 50,848 | |||
Earnings per share: | |||||||||
Basic | $ | 1.59 | $ | 1.27 | $ | 0.96 | |||
Diluted | $ | 1.50 | $ | 1.19 | $ | 0.91 | |||
Weighted average shares outstanding: | |||||||||
Basic | 52,445 | 52,838 | 53,058 | ||||||
Diluted | 55,634 | 56,139 | 55,773 | ||||||
Cash dividends declared per common share | $ | 0.34 | $ | 0.20 | $ | — | |||
34The accompanying Notes are an integral part of these Consolidated Financial Statements.
Consolidated Balance Sheets
(In thousands, except share data)
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 26,866 | $ | 21,762 | ||||
Receivables, net | 42,809 | 33,887 | ||||||
Receivables pledged under receivables facility | 98,976 | 63,702 | ||||||
Product inventories, net | 330,575 | 195,787 | ||||||
Prepaid expenses | 5,190 | 6,057 | ||||||
Deferred income taxes | 7,977 | 2,340 | ||||||
Total current assets | 512,393 | 323,535 | ||||||
Property and equipment, net | 25,598 | 18,595 | ||||||
Goodwill | 139,546 | 104,684 | ||||||
Other intangible assets, net | 22,838 | 12,620 | ||||||
Equity interest investments | 29,907 | 18,616 | ||||||
Other assets, net | 6,354 | 2,816 | ||||||
Total assets | $ | 736,636 | $ | 480,866 | ||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 174,170 | $ | 113,114 | ||||
Accrued and other current liabilities | 76,645 | 38,287 | ||||||
Short-term financing | 65,657 | 42,595 | ||||||
Current portion of long-term liabilities | 1,350 | 1,350 | ||||||
Total current liabilities | 317,822 | 195,346 | ||||||
Deferred income taxes | 14,600 | 11,625 | ||||||
Long-term debt | 129,100 | 50,420 | ||||||
Other long-term liabilities | 2,134 | 3,140 | ||||||
Total liabilities | 463,656 | 260,531 | ||||||
Stockholders’ equity: | ||||||||
Common stock, $.001 par value; 100,000,000 shares authorized; 52,414,883 and 52,186,711 shares issued and outstanding at December 31, 2005 and 2004, respectively | 52 | 52 | ||||||
Additional paid-in capital | 96,051 | 76,729 | ||||||
Retained earnings | 176,362 | 141,772 | ||||||
Treasury stock | (921 | ) | — | |||||
Unearned compensation | (703 | ) | (1,092 | ) | ||||
Accumulated other comprehensive income | 2,139 | 2,874 | ||||||
Total stockholders’ equity | 272,980 | 220,335 | ||||||
Total liabilities and stockholders’ equity | $ | 736,636 | $ | 480,866 | ||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
Consolidated Statements of Cash Flows
(In thousands)
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Operating activities | ||||||||||||
Net income | $ | 83,621 | $ | 66,941 | $ | 50,848 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation | 5,410 | 5,895 | 5,523 | |||||||||
Amortization | 4,388 | 4,758 | 4,312 | |||||||||
Provision for doubtful accounts receivable, net of write-offs | (332 | ) | (774 | ) | 544 | |||||||
Provision for inventory obsolescence, net of write-offs | 115 | (51 | ) | 16 | ||||||||
Change in deferred income taxes | (5,096 | ) | 703 | 7,456 | ||||||||
Loss on sale of property and equipment | 133 | 43 | 329 | |||||||||
Equity earnings in unconsolidated investments | (2,386 | ) | — | — | ||||||||
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures: | ||||||||||||
Receivables | (13,394 | ) | (12,879 | ) | (4,976 | ) | ||||||
Product inventories | (103,579 | ) | (2,681 | ) | 2,030 | |||||||
Prepaid expenses and other assets | (934 | ) | (2,300 | ) | (1,576 | ) | ||||||
Accounts payable | 41,932 | (6,880 | ) | 16,322 | ||||||||
Accrued expenses and other current liabilities | 28,207 | 3,660 | (2,068 | ) | ||||||||
Net cash provided by operating activities | 38,085 | 56,435 | 78,760 | |||||||||
Investing activities | ||||||||||||
Acquisition of businesses, net of cash acquired | (89,963 | ) | (644 | ) | (21,772 | ) | ||||||
Equity interest investments | (3,539 | ) | (6,961 | ) | — | |||||||
Purchase of property and equipment, net of sale proceeds | (8,361 | ) | (6,063 | ) | (8,351 | ) | ||||||
Net cash used in investing activities | (101,863 | ) | (13,668 | ) | (30,123 | ) | ||||||
Financing activities | ||||||||||||
Proceeds from revolving line of credit | 364,383 | 340,104 | 195,800 | |||||||||
Payments on revolving line of credit | (345,703 | ) | (328,584 | ) | (282,075 | ) | ||||||
Proceeds from asset-backed financing | 67,133 | 66,522 | 102,270 | |||||||||
Payments on asset-backed financing | (44,071 | ) | (66,345 | ) | (62,029 | ) | ||||||
Proceeds from other long-term debt | 60,000 | — | 3,711 | |||||||||
Payments on other long-term debt | (1,350 | ) | (2,023 | ) | (1,014 | ) | ||||||
Payment of deferred financing costs | (243 | ) | (483 | ) | (626 | ) | ||||||
Issuance of common stock under stock option plans | 19,322 | 6,917 | 4,322 | |||||||||
Payment of cash dividends | (17,862 | ) | (10,706 | ) | — | |||||||
Purchase of treasury stock | (32,091 | ) | (40,823 | ) | (3,336 | ) | ||||||
Net cash provided by (used in) financing activities | 69,518 | (35,421 | ) | (42,977 | ) | |||||||
Effect of exchange rate changes on cash | (636 | ) | 1,604 | 2,020 | ||||||||
Increase in cash and cash equivalents | 5,104 | 8,950 | 7,680 | |||||||||
Cash and cash equivalents at beginning of year | 21,762 | 12,812 | 5,132 | |||||||||
Cash and cash equivalents at end of year | $ | 26,866 | $ | 21,762 | $ | 12,812 | ||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
SCP POOL CORPORATION
Consolidated Statements of Cash Flows (continued)
(In thousands)
Supplemental cash flow information | Year Ended December 31, | ||||||||
| 2005 | 2004 | 2003 | |||||||
Cash paid during the year for: | |||||||||
Interest | $ | 5,660 | $ | 2,965 | $ | 3,256 | |||
Income taxes, net of refunds | 14,313 | 36,053 | 24,883 | ||||||
See Note 2 for the net assets acquired and liabilities assumed for acquisitions recorded using the purchase method of accounting.
The accompanying Notes are an integral part of these Consolidated Financial Statements.
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, amounts in Dollars except share data)
| Common Stock | Treasury Stock | Additional Capital | Unearned Compensation | Retained Earnings | Accumulated Income (Loss) | Total | |||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||
Balance at December 31, 2002 | 53,088 | 53 | — | 63,525 | (575 | ) | 78,847 | 91 | 141,941 | ||||||||||||||
Net income | — | — | — | — | — | 50,848 | — | 50,848 | |||||||||||||||
Foreign currency translation, net of tax of $763 | — | — | — | — | — | �� | 1,201 | 1,201 | |||||||||||||||
Interest rate swaps, net of tax of $11 | — | — | — | — | — | — | (17 | ) | (17 | ) | |||||||||||||
Comprehensive income, net of tax | 52,032 | ||||||||||||||||||||||
Treasury stock, 288 shares of common stock | — | — | (3,336 | ) | — | — | — | — | (3,336 | ) | |||||||||||||
Retirement of treasury shares | (288 | ) | — | 3,336 | — | — | (3,336 | ) | — | — | |||||||||||||
Unearned compensation | — | — | — | — | 285 | — | — | 285 | |||||||||||||||
Exercise of stock options including tax benefit of $2,107 | 372 | — | — | 3,755 | — | — | — | 3,755 | |||||||||||||||
Employee stock purchase plan | 50 | — | — | 564 | — | — | — | 564 | |||||||||||||||
Balance at December 31, 2003 | 53,222 | 53 | — | 67,844 | (290 | ) | 126,359 | 1,275 | 195,241 | ||||||||||||||
Net income | — | — | — | — | — | 66,941 | — | 66,941 | |||||||||||||||
Foreign currency translation, net of tax of $1,011 | — | — | — | — | — | — | 1,582 | 1,582 | |||||||||||||||
Interest rate swaps, net of tax of $11 | — | — | — | — | — | — | 17 | 17 | |||||||||||||||
Comprehensive income, net of tax | 68,540 | ||||||||||||||||||||||
Treasury stock, 1,568 shares of common stock | — | — | (40,823 | ) | — | — | — | — | (40,823 | ) | |||||||||||||
Retirement of treasury shares | (1,568 | ) | (1 | ) | 40,823 | — | — | (40,822 | ) | — | — | ||||||||||||
Unearned compensation | — | — | — | — | (802 | ) | — | — | (802 | ) | |||||||||||||
Exercise of stock options including tax benefit of $3,886 | 419 | — | — | 6,512 | — | — | — | 6,512 | |||||||||||||||
Declaration of cash dividends | — | — | — | — | — | (10,706 | ) | — | (10,706 | ) | |||||||||||||
Issuance of restricted stock | 55 | — | — | 1,226 | — | — | — | 1,226 | |||||||||||||||
Employee stock purchase plan | 58 | — | — | 1,147 | — | — | — | 1,147 | |||||||||||||||
Balance at December 31, 2004 | 52,186 | 52 | — | 76,729 | (1,092 | ) | 141,772 | 2,874 | 220,335 | ||||||||||||||
Net income | — | — | — | — | — | 83,621 | 83,621 | ||||||||||||||||
Foreign currency translation including tax benefit of $548 | — | — | — | — | — | — | (836 | ) | (836 | ) | |||||||||||||
Interest rate swap, net of tax of $63 | — | — | — | — | — | — | 101 | 101 | |||||||||||||||
Comprehensive income, net of tax | 82,886 | ||||||||||||||||||||||
Treasury stock, 964 shares of common stock | — | — | (32,091 | ) | — | — | — | — | (32,091 | ) | |||||||||||||
Retirement of treasury shares | (939 | ) | (1 | ) | 31,170 | — | — | (31,169 | ) | — | — | ||||||||||||
Unearned compensation | — | — | — | — | 389 | — | — | 389 | |||||||||||||||
Exercise of stock options including tax benefit of $14,133 | 1,124 | 1 | — | 18,125 | — | — | — | 18,126 | |||||||||||||||
Declaration of cash dividends | — | — | — | — | — | (17,862 | ) | — | (17,862 | ) | |||||||||||||
Employee stock purchase plan | 44 | — | — | 1,197 | — | — | — | 1,197 | |||||||||||||||
Balance at December 31, 2005 | 52,415 | 52 | (921 | ) | 96,051 | (703 | ) | 176,362 | 2,139 | 272,980 | |||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies
Description of Business
As of December 31, 2005, SCP Pool Corporation and its wholly owned subsidiaries (theCompany, which may be referred to asPOOL,we, usorour), maintained 246 service centers in North America and Europe from which we sell swimming pool equipment, parts and supplies and irrigation and landscape products to pool builders, retail stores, service companies, and landscape contractors. We distribute products through three networks: The SCP Distributors (SCP) network, the Superior Pool Products (Superior) network and the Horizon Distributors (Horizon) network.
Basis of Presentation and Principles of Consolidation
We prepared the consolidated financial statements following accounting principles generally accepted in the United States (GAAP) and the requirements of the Securities and Exchange Commission (SEC). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results.
The consolidated financial statements include the accounts of SCP Pool Corporation and our wholly owned subsidiaries. We eliminated all significant intercompany accounts and transactions among our wholly owned subsidiaries. We account for our 38% investment in Latham Acquisition Corporation (LAC) and our 50% investment in Northpark Corporate Center, LLC (NCC) using the equity method of accounting. Accordingly, we report our share of income or loss based on our ownership interests in these investments.
Use of Estimates
In order to prepare financial statements that conform to GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Our most significant estimates are those relating to the allowance for doubtful accounts, the inventory reserve and the reserve for tax contingencies. We continually review our estimates and make adjustments as necessary, but actual results could be significantly different from what we expected when we made these estimates.
Segment Reporting
Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 131,Disclosures about Segments of an Enterprise and Related Information,establishes standards for the way that public companies report information about operating segments in annual financial statements and for related disclosures about products and services, geographic areas and major customers. POOL’s management evaluates our service centers based upon their individual performance relative to predetermined standards that include both financial and operational measures. Additionally, POOL’s management makes decisions about how to allocate resources primarily on a service center-by-service center basis. Since all of our service centers have similar operations and share similar economic characteristics, we aggregate our service centers into a single reportable segment
Seasonality and Weather
Our business is highly seasonal, and weather is the principal external factor affecting our business. In general, sales and net income are highest during the second and third quarters, which represent the peak months of both swimming pool use and installation and landscape installations and maintenance. Sales are substantially lower during the first and fourth quarters when we may incur net losses.
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
Stock Split
In August 2004, our Board of Directors declared a three-for-two stock split of our common stock, which was paid in the form of a stock dividend on September 10, 2004 to the stockholders of record at the close of business on August 23, 2004. Accordingly, all share and per share data and the related capital amounts for all periods presented reflect the effects of this split.
Earnings Per Share
In accordance with SFAS 128,Earnings per Share, we calculate basic earnings per share by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share includes the dilutive effects of stock awards.
Financial Instruments
The carrying values of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments. The carrying amount of long-term debt approximates fair value as it bears interest at variable rates.
Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Credit Risk and Allowance for Doubtful Accounts
We record our trade receivables at the invoiced amount less an allowance for doubtful accounts for estimated losses due to customer non-payment. We perform periodic credit evaluations of our customers and we typically do not require collateral. Consistent with industry practices, we require payment from our customers within 30 days except for sales under early buy programs for which we provide extended payment terms to qualified customers. Our historical credit losses have been within or better than our expectations. The following table summarizes the changes in our allowance for doubtful accounts for the past three years (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
Balance at beginning of year | $ | 3,138 | $ | 3,843 | $ | 3,299 | ||||||
Acquisition of business | 1,160 | — | 350 | |||||||||
Bad debt expense | 1,850 | 1,308 | 2,136 | |||||||||
Write-offs, net of recoveries | (1,937 | ) | (2,013 | ) | (1,942 | ) | ||||||
Balance at end of year | $ | 4,211 | $ | 3,138 | $ | 3,843 | ||||||
Product Inventories and Reserve for Inventory Obsolescence
Product inventories consist primarily of goods purchased from manufacturers for resale to our customers. We record inventory at the lower of cost, using the average cost method, or market. We establish our reserve for inventory obsolescence based on inventory turns by category with particular emphasis on stock keeping units with the weakest sales over the previous 12 months. The reserve is intended to reflect the value of inventory that we may not be able to sell at a profit.
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
In evaluating the adequacy of our reserve for inventory obsolescence at the service center level, we consider a combination of factors including:
Our reserve for inventory obsolescence may periodically require adjustment as changes occur in the above-identified factors.
The following table summarizes the changes in our allowance for inventory obsolescence for the past three years (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
Balance at beginning of year | $ | 3,085 | $ | 3,115 | $ | 3,099 | ||||||
Acquisition of business | 685 | — | — | |||||||||
Inventory writedowns | 808 | 346 | (6 | ) | ||||||||
Inventory write-offs | (703 | ) | (376 | ) | 22 | |||||||
Balance at end of year | $ | 3,875 | $ | 3,085 | $ | 3,115 | ||||||
Vendor Rebates
We account for vendor rebates in accordance with the Emerging Issues Task Force Issue 02-16,Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.Many of our arrangements with our vendors provide for us to receive a rebate of a specified amount of consideration, payable to us when we achieve any of a number of measures, generally related to the volume level of purchases from our vendors. We account for such rebates as a reduction of the prices of the vendor’s products and therefore as a reduction of inventory until we sell the product, at which time such rebates reduce cost of sales in our income statement. Throughout the year, we estimate the amount of the rebate earned based on our estimate of purchases to date relative to the purchase levels that mark our progress toward earning the rebates. We continually revise these estimates to reflect actual rebates earned based on actual purchase levels.
Property and Equipment
Property and equipment are stated at cost. We depreciate property and equipment on a straight-line basis over the following estimated useful lives:
| ||
| Buildings | 40 years | |
| Leasehold improvements | ||
| Autos and | 3 years | |
| Machinery and equipment | 10 years | |
| Computer equipment | 3 - 5 years | |
| Furniture and fixtures | 10 years |
| (1) | For substantial improvements made near the end of a lease term where we are reasonably certain the lease will be renewed, we amortize the leasehold improvement over the remaining life of the lease including the expected renewal period. |
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
The table below presents depreciation expense for the past three years (in thousands):
2005 | 2004 | 2003 | ||
$ 5,410 | $5,898 | $5,523 |
Goodwill and Other Intangible Assets
Goodwill represents the excess of the amount we paid to acquire a company over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. We account for goodwill under the provisions of SFAS 142,Goodwill and Other Intangible Assets. In accordance with these rules, we test goodwill for impairment annually or at any other time when impairment indicators exist. For additional discussion of goodwill and other intangible assets, see Note 3.
Self Insurance
We retain certain self-insurance risks for both health benefits and property and casualty insurance programs. We have limited our exposure by maintaining excess and aggregate liability coverage. We establish self-insurance reserves based on claims filed and estimates of claims incurred but not reported. The estimates are based on information provided to us by the claims administrators.
Advertising Costs
We expense advertising costs when incurred. The table below presents advertising expense for the past three years (in thousands):
2005 | 2004 | 2003 | ||
$ 7,763 | $6,830 | $7,106 |
Income Taxes
We record deferred tax assets or liabilities based on differences between financial reporting and tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when we expect the differences to reverse. Due to changing tax laws and state income tax rates, significant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future. For additional discussion of income taxes, see Note 7.
Stock Compensation Arrangements
Under the provisions of SFAS 123,Accounting for Stock-Based Compensation, companies may account for employee stock options and stock equity grants using either (i) SFAS 123’s fair value method or (ii) the intrinsic value method provided by APB 25,Accounting for Stock Issued to Employees.Under the SFAS 123 fair value method, companies recognize compensation expense related to employee stock options based on the fair value of the options on the grant date as estimated by an option pricing model. The intrinsic value method prescribed by APB 25 requires recognition of compensation expense over the option vesting period when the exercise price of the granted options is less than the stock’s market price on the grant date. Under both methods, stock equity grants are recognized as compensation expense over the grant vesting period based on the fair value of the grant at time of issuance.
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
We account for our employee stock options under the intrinsic value method described by APB 25. Accordingly, we do not record compensation expense for options issued with an exercise price equal to the stock’s market price on the grant date. The table below presents pre-tax compensation expense for stock options with a five year vesting period granted below market price in 1999, 2000 and 2001 (in thousands):
2005 | 2004 | 2003 | ||
$ 90 | $184 | $286 |
If we had accounted for our stock-based compensation using the fair value method described in SFAS 123, our net income and earnings per share would have been reduced to the pro-forma amounts below (in thousands, except per share data):
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Reported net income | $ | 83,621 | $ | 66,941 | $ | 50,848 | ||||||
Add: Stock-based employee compensation expense included in reported net | 658 | 537 | 523 | |||||||||
Deduct: Stock-based employee compensation expense determined under the fair | (3,502 | ) | (3,672 | ) | (2,888 | ) | ||||||
Pro-forma net income | $ | 80,777 | $ | 63,806 | $ | 48,483 | ||||||
Basic earnings per share: | ||||||||||||
As reported | $ | 1.59 | $ | 1.27 | $ | 0.96 | ||||||
Pro-forma | $ | 1.54 | $ | 1.21 | $ | 0.91 | ||||||
Diluted earnings per share: | ||||||||||||
As reported | $ | 1.50 | $ | 1.19 | $ | 0.91 | ||||||
Pro-forma | $ | 1.45 | $ | 1.14 | $ | 0.87 | ||||||
For purposes of pro-forma disclosures, the estimated fair value of employee options is ratably expensed over the options’ vesting period. We estimated the fair value of these options at the grant date using a Black-Scholes option pricing model with the following weighted average assumptions:
| December 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
Risk-free interest rate | 4.22 | % | 3.87 | % | 3.38 | % | |||
Expected dividend yield | 1.0 | % | — | — | |||||
Expected volatility | 30.3 | % | 34.9 | % | 32.5 | % | |||
Weighted average expected life | 7.0 years | 7.0 years | 7.0 years | ||||||
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
The Black-Scholes option valuation model was developed to estimate the fair value of traded options that have no vesting restrictions and are fully transferable. Additionally, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. In our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options because:
| 1. | the characteristics of our employee stock options are significantly different from those of traded options; and |
| 2. | changes in the subjective input assumptions can materially affect the fair value estimate. |
In December 2004, the FASB issued SFAS 123(R),Share-Based Payment. This new standard will require companies to recognize compensation cost for stock options and other stock-based awards based on their value as measured on the grant date. The new standard prohibits companies from accounting for stock-based compensation under the provisions of APB 25.
We adopted SFAS 123(R) effective January 1, 2006 and we are currently in the process of implementing the provisions of the statement. We have selected a Black-Scholes model for estimating the grant date fair value of share-based payments under
FAS 123(R) and we plan to use the modified-retrospective transition method. As such, beginning in the first quarter of 2006 we will adjust all prior period financial statements to reflect compensation cost for the amounts previously reported in our pro-forma footnote disclosures required by SFAS 123.
In 2006, we expect the annualized impact from SFAS 123(R) to our diluted earnings per share will approximate $0.05 to $0.06, which is consistent with the annualized impact of the pro-forma net income and earnings per share disclosed above.
Revenue Recognition
We recognize revenue in accordance with SEC Staff Accounting Bulletin (SAB) 104,Revenue Recognition in Financial Statements, and the appropriate amendments. SAB 104 requires that four basic criteria must be met before we can recognize revenue:
| 1. | persuasive evidence of an arrangement exists; |
| 2. | delivery has occurred or services have been rendered; |
| 3. | the seller’s price to the buyer is fixed or determinable; and |
| 4. | collectibility is reasonably assured. |
We record revenue when customers take delivery of products. Customers may pick up products at any service center location, or products may be delivered via our trucks or third party carriers. Products shipped via third party carriers are considered delivered based on the shipping terms, which are generally FOB shipping point.
We may offer volume rebates, which we accrue monthly as an adjustment to net sales. We record customer returns, including those associated with early buy programs, as an adjustment to net sales. In the past, customer returns have not been material.
Derivatives and Hedging Activities
We recognize all derivatives at fair value on the balance sheet. The effective portion of changes in the fair value of derivatives qualifying as cash flow hedges are recognized in other comprehensive income until the hedged item is recognized in earnings, or until it becomes unlikely that the hedged transaction will occur. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
In December 2005 we entered into an interest rate swap agreement to reduce our exposure to fluctuations in interest rates. We have designated this swap as a cash flow hedge. Any difference paid or received on the interest rate swap will be recognized as an adjustment to interest expense over the life of the swap. The swap will be in effect as of June 30, 2006 and terminate on December 31, 2008.
Shipping and Handling Costs
We include shipping and handling fees billed to customers in net sales, and we record shipping and handling costs associated with inbound freight as cost of sales. The table below presents shipping and handling costs associated with outbound freight, which we include in selling, general and administrative expenses (in thousands):
2005 | 2004 | 2003 | ||
$ 27,332 | $23,261 | $19,908 |
Reclassifications
We have reclassified the payment of deferred financing costs and the related non-cash amortization of these amounts in our 2004 and 2003 Consolidated Statements of Cash Flows to conform to the 2005 presentation. The non-cash amortization was reclassed within the operating activities section to the amortization line item. Additionally, deferred financing costs have been reclassified as a use of cash from financing activities. Previously, we classified these amounts as a change in prepaid and other assets. These reclassifications had no effect on net income or earnings per share as previously reported.
We reclassified certain deferred tax amounts in our 2003 Consolidated Balance Sheet to conform to the 2004 presentation. This reclassification had no effect on net income or earnings per share as previously reported.
Note 2 - Acquisitions and Divestitures
2005 Acquisitions
In October 2005, we acquired Automatic Rain Company through our newly formed and wholly owned subsidiary Horizon Distributors, Inc. (Horizon). Horizon is a leading regional wholesale distributor of irrigation and landscape products serving professional contractors in the landscape construction and maintenance markets. We believe this transaction brings added depth and diversity to our operations through an extension of our complementary products offerings and furthers our objective of being the resource for pool and landscaping contractors. Horizon is a natural addition to our business, as irrigation and landscaping are often key components to completing a swimming pool installation or remodel.
The purchase price for the issued and outstanding stock of Automatic Rain Company was approximately $87.1 million in cash, which includes approximately $1.4 million in working capital adjustments that were recorded as of December 31, 2005, and paid subsequent to year-end. The purchase price was determined based on our negotiations with the former shareholders of Automatic Rain Company and our valuation considerations, which included historical and prospective earnings, net asset value and other valuation considerations consistent with our historical valuation of acquisitions.
The acquisition was accounted for as a purchase business combination with the purchase price preliminarily allocated to the fair values of the acquired assets net of assumed liabilities. In connection with the acquisition, we recorded other intangible assets totaling $14.4 million for the estimated fair value of a tradename, a non-compete agreement and certain employment contracts. We also recorded $33.0 million of goodwill in connection with the acquisition. The results of operations of Horizon are included in the consolidated statements of income since the acquisition date.
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
Current assets | $ | 64,184 | |
Property and equipment, net | 3,875 | ||
Goodwill | 33,030 | ||
Other intangible assets | 14,400 | ||
Other assets | 176 | ||
Total assets acquired | 115,665 | ||
Current liabilities | 28,538 | ||
Net assets acquired | $ | 87,127 | |
The purchase price allocations have been completed on a preliminary basis, subject to adjustment should new or additional facts about the business become known. We expect to finalize the allocations by the second quarter of 2006.
The components of intangible assets listed in the table above as of the acquisition date are as follows (in thousands):
Horizon tradename (indefinite life) | $ | 8,400 | |
Non-compete agreement (5 year useful life) | 2,400 | ||
Employment contracts (3.7 year weighted average useful life) | 3,600 | ||
Total other intangible assets | $ | 14,400 | |
We determined that the Horizon tradename has an indefinite life, and therefore it is not subject to amortization. We are amortizing the non-compete agreement and employee contracts using the straight-line method over their contractual lives.
In October 2005, we also acquired B&B s.r.l. (Busatta), a swimming pool supply distributor based in the northwestern Italian city of San Bernardo d’Ivrea, near Turin, as well as the assets of Direct Replacements, Inc., a Marietta, Georgia packaged pool distributor. Busatta is our first location in Italy and allows us to further our presence in the European market. The Marietta location will support our existing metropolitan Atlanta service centers until its launch as a new service center location in 2006. We have included the results of operations for Busatta and Direct Replacements, Inc. in our Consolidated Financial Statements since the respective acquisition dates.
2004 Acquisitions and Divestitures
In December 2004, we acquired certain assets of Latham International LP’s Canadian subsidiary, Pool Tech Distribution Inc., (Pool Tech or the Pool Tech Acquisition). Pool Tech distributes swimming pool supplies and equipment through three service centers in Ontario, Canada. We funded this transaction primarily through the exchange of manufacturing assets held by our subsidiary, Les Industries R.P. Inc. As a part of this transaction, we also completed the divestiture of our manufacturing assets located in Fort Wayne, Indiana to LAC. In exchange for these assets and cash consideration, we received a 42% interest in LAC. Our decision to divest of our manufacturing facilities in Canada and Indiana allows us to focus on our core distribution business while our investment in LAC provides us with a strategic relationship with an important supplier.
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
During the third quarter of 2005, we finalized our allocation of the fair value received in connection with the 2004 Acquisitions and completed certain working capital adjustments that resulted in the following changes, including adjustments to the amount of goodwill recorded, the estimated fair value of the non-compete agreement and the deferred gain recorded on the exchange as a reduction to our investment in LAC:
| December 31, | ||||||
(in thousands) | 2005 | 2004 | ||||
Goodwill | $ | 2,190 | $ | 4,629 | ||
Other intangible assets | 1,342 | 1,908 | ||||
Equity interest investments | 187 | 5,157 | ||||
Product inventories, net | 5,139 | 5,280 | ||||
Accrued and other liabilities | 1,958 | 135 | ||||
Other intangible assets reflects the estimated fair value of the non-compete agreement related to Pool Tech, which we are amortizing on a straight-line basis over the five year contractual life. We recorded a $0.2 million gain on the exchange, the entire amount of which was deferred and recorded as a reduction of our investment in LAC. We disposed of approximately $12.9 million of goodwill in connection with the divestiture of our manufacturing assets in Canada and Indiana. In connection with this transaction, LAC acquired the business of Latham International, LP, a manufacturer of vinyl swimming pool liners, polymer and steel panels, steps and related swimming pool products based in Albany, New York.
We have included the results of operations for Pool Tech in our Consolidated Financial Statements since the acquisition date. We account for our interest in LAC using the equity method of accounting. Accordingly, we report our share of income or loss based on our ownership interest in LAC.
2003 Acquisitions
In May 2003, we acquired the capital stock of Les Industries R.P. Inc. (the Quebec Acquisition), a distributor and manufacturer of swimming pool products operating one service center in Quebec, Canada. In connection with the Quebec Acquisition, we recorded the cost of a non-compete agreement totaling $0.7 million, which we are amortizing using the straight-line method over the agreement’s six year contractual life. We also recorded approximately $1.3 million of goodwill in connection with the acquisition. As discussed above, in December 2004 we disposed of the manufacturing assets acquired in the Quebec Acquisition.
In August 2003, we acquired Sud Ouest Filtration (the SOFI Acquisition), a distributor and manufacturer of swimming pool products operating one service center in Bordeaux, France. The SOFI Acquisition represents our fourth location in France and expanded our market presence to the southwest part of that country. We also acquired in August certain assets of Mepasa Albercas, a swimming pool distributor in Cuernavaca, Mexico (the Mepasa Acquisition). The Cuernavaca service center is our first location in Latin America.
On October 1, 2003, we purchased substantially all of the assets of the distribution division of Litehouse Products, Inc. (the Litehouse Acquisition), which established a strong presence for us in northern Ohio and adjacent markets. We recorded approximately $2.5 million of goodwill in connection with this acquisition, all of which we expect will be deductible for tax purposes. The purchase agreement includes that a portion of the purchase price be paid in annual installments of $0.4 million for five years. We recorded these future payments as goodwill at the present value of $1.9 million, which we calculated using an interest rate of 2.6%. We signed two non-compete agreements totaling $3.0 million with certain shareholders of Litehouse Products, Inc. Additionally, we recorded a distribution agreement with the Litehouse retail stores as an
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
intangible asset at the present value of the estimated fair value of $6.1 million, which we calculated using an interest rate of 2.6%. We are amortizing the non-compete and distribution agreements using the straight-line method over the five year contractual lives.
In November 2003, we purchased substantially all of the distribution assets of Hayward Iberica, S.A., an indirect wholly owned subsidiary of Hayward Pool Products, Inc. (the Iberica Acquisition). Iberica distributed primarily Hayward equipment from two service centers in Madrid and Valencia, Spain. These two service centers are our first locations in Spain and allow us to further our presence in the European market.
We have included the results of operations of the Quebec, SOFI, Mepasa, Litehouse and Iberica Acquisitions in our Consolidated Financial Statements since the respective acquisition dates.
Note 3 - Goodwill and Other Intangible Assets
In October 2005, we performed our annual goodwill impairment test, which requires comparison of our Company’s estimated fair value to the book value, including goodwill. As a result of this test, we believe the goodwill on our balance sheet is not impaired.
The changes in the carrying amount of goodwill are as follows (in thousands):
Balance at December 31, 2003 | $ | 112,140 | ||
Acquired goodwill | 4,728 | |||
Purchase price adjustments | 672 | |||
Goodwill disposal | (12,856 | ) | ||
Balance at December 31, 2004 | 104,684 | |||
Acquired goodwill | 37,015 | |||
Purchase price adjustments | (2,153 | ) | ||
Balance at December 31, 2005 | $ | 139,546 | ||
Purchase price adjustments in 2004 represent payment of contingent amounts related to the 2003 Quebec Acquisition. Purchase price adjustments in 2005 represent payment of contingent amounts related to the 2003 Quebec Acquisition and certain adjustments related to the Pool Tech Acquisition.
Other intangible assets consist of the following (in thousands):
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Tradename (indefinite life) | $ | 8,400 | $ | — | ||||
Non-compete agreements (5.0 year weighted average useful life) | 15,605 | 15,531 | ||||||
Employee contracts (3.7 year weighted average useful life) | 3,600 | — | ||||||
Distribution agreement (5 year useful life) | 6,115 | 6,115 | ||||||
| 33,720 | 21,646 | |||||||
Less accumulated amortization | (10,882 | ) | (9,026 | ) | ||||
| $ | 22,838 | $ | 12,620 | |||||
The tradename has an indefinite useful life, and therefore is not subject to amortization. The tradename is subject to periodic impairment testing under FAS 142. The non-compete and distribution agreements have finite useful lives, and as such, we amortize these agreements using the straight-line method over their respective contractual terms. Other intangible amortization expense was $3.9 million in 2005 and $4.0 million in 2004.
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
The table below presents estimated amortization expense for other intangible assets for the next five years (in thousands):
2006 | $ | 4,817 | |
2007 | 4,433 | ||
2008 | 3,075 | ||
2009 | 1,585 | ||
2010 | 528 |
Note 4 - Details of Certain Balance Sheet Accounts
The table below presents additional information regarding certain balance sheet accounts (in thousands):
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Receivables: | ||||||||
Trade accounts | $ | 10,462 | $ | 10,545 | ||||
Trade accounts, pledged | 98,976 | 63,702 | ||||||
Vendor rebates | 31,450 | 21,662 | ||||||
Other | 5,108 | 4,818 | ||||||
| 145,996 | 100,727 | |||||||
Less allowance for doubtful accounts | (4,211 | ) | (3,138 | ) | ||||
| $ | 141,785 | $ | 97,589 | |||||
Property and equipment: | ||||||||
Land | $ | 1,257 | $ | 1,026 | ||||
Building | 1,342 | 1,342 | ||||||
Leasehold improvements | 10,597 | 7,182 | ||||||
Autos and trucks | 880 | 499 | ||||||
Machinery and equipment | 14,632 | 12,270 | ||||||
Computer equipment | 16,156 | 12,647 | ||||||
Furniture and fixtures | 8,488 | 7,441 | ||||||
| 53,352 | 42,407 | |||||||
Less accumulated depreciation | (27,754 | ) | (23,812 | ) | ||||
| $ | 25,598 | $ | 18,595 | |||||
Accrued expenses and other current liabilities: | ||||||||
Salaries, bonuses and profit sharing | $ | 24,022 | $ | 17,532 | ||||
Current deferred tax liability | 7,750 | 9,202 | ||||||
Other | 44,873 | 11,553 | ||||||
| $ | 76,645 | $ | 38,287 | |||||
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
Note 5 - Debt
The components of our long-term debt for the past two years were as follows (in thousands):
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Revolving Line of Credit, variable rate (described below) | $ | 69,100 | $ | 50,420 | ||||
Term loan, variable rate (described below) | 60,000 | — | ||||||
Purchase price payments to Litehouse | 1,111 | 1,482 | ||||||
Payments due - non-compete agreements | 2,029 | 3,008 | ||||||
Other | 344 | — | ||||||
| 132,584 | 54,910 | |||||||
Less current portion | (1,350 | ) | (1,350 | ) | ||||
Total long-term debt | $ | 131,234 | $ | 53,560 | ||||
On December 20, 2005, we amended our unsecured syndicated senior credit facility (the Credit Facility) to provide for additional borrowing capacity. The amended Credit Facility, which matures on December 20, 2010, provides for a $120.0 million five-year revolving credit facility (the Revolver) and a $60.0 million term loan (the Term Loan). The Credit Facility includes sublimits for the issuance of swingline loans and standby letters of credit. The aggregate maximum principal amount of the commitments under the Credit Facility may be increased from time to time by a total amount up to $40.0 million.
At December 31, 2005, there was $69.1 million outstanding and $49.2 million available for borrowing under the Revolver. The average effective interest rate of the Revolver was approximately 4.5% for the year ended December 31, 2005.
Borrowings under the Revolver bear interest, at our option, at either of the following:
| a. | a base rate, which is the greater of (i) the Wachovia Bank, National Association prime rate or (ii) the overnight Federal Funds Rate plus 0.50%; or |
| b. | the London Interbank Offered Rate (LIBOR) plus a spread ranging from 0.600% to 1.250%, with such spread in each case depending on our leverage ratio. |
Borrowings under the Term Loan bear interest, at our option, at either of the following:
| a. | a base rate, which is the greater of (i) the Wachovia Bank, National Association prime rate or (ii) the overnight Federal Funds Rate plus 0.50%; or |
| b. | the London Interbank Offered Rate (LIBOR) plus a spread ranging from 0.625% to 0.750%, with such spread in each case depending on our leverage ratio. |
We are also required to pay (a) an annual facility fee of 0.150% to 0.250%, with such spread in each case depending on our leverage ratio, (b) an annual commercial letter of credit issuance fee of 0.125% multiplied by the face amount of each letter of credit and (c) a letter of credit commission of 0.150% to 0.250% multiplied by face amount of each letter of credit, with such spread in each case depending on our leverage ratio.
At December 31, 2005, there was $60.0 million outstanding on the Term Loan. The total outstanding balance is classified as long-term since our first scheduled principal payment on the Term Loan is not due until March 31, 2007. The average effective interest rate of the Term Loan was approximately 5.4% for the year ended December 31, 2005.
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
In December 2005, we entered into an interest rate swap agreement as a cash flow hedge to reduce our exposure to fluctuations in interest rates on the Term Loan. The swap will be in effect as of June 30, 2006 and will terminate on December 31, 2008.
Our obligations under the Credit Facility are guaranteed by all of our existing and future direct and indirect subsidiaries. The Credit Facility contains terms and provisions (including representations, covenants and conditions) and events of default customary for transactions of this type. If an event of default occurs and is continuing under the Credit Facility, the lenders may terminate their obligations thereunder and may require us to repay all amounts thereunder. Financial covenants include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio. Other covenants include restrictions on our ability to, among other things, pay dividends or make other capital distributions (other than in accordance with our current dividend policy).
In March 2005, we renewed our accounts receivable securitization facility (the Receivables Facility), which provides a seasonal borrowing capacity of up to $100.0 million, through March 2006. 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 sheet. We employed this arrangement because it provides us with a lower cost form of financing. The Receivables Facility has numerous restrictive covenants, which require that we maintain a minimum average total leverage ratio, fixed charge coverage ratio and minimum net worth ratio. At December 31, 2005, there was $65.7 million outstanding under the Receivables Facility at an average effective interest rate of 4.0%.
As of December 31, 2005, we were in compliance with all covenants and financial ratio requirements related to our Credit Facility and our Receivables Facility.
We capitalize financing costs we incur related to implementing and amending our debt. These costs are amortized over the contractual life of the related debt. The changes in deferred financing costs are as follows (in thousands):
| 2005 | 2004 | |||||||
Balance at beginning of year | $ | 2,010 | $ | 1,527 | ||||
Financing cost deferred | 243 | 483 | ||||||
Write off fully amortized financing costs | (1,527 | ) | — | |||||
Balance at end of year | 726 | 2,010 | ||||||
Less accumulated amortization | (134 | ) | (1,563 | ) | ||||
| $ | 592 | $ | 447 | |||||
Note 6 - Comprehensive Income
Comprehensive income includes net income, foreign currency translation adjustments and the unrealized gain or loss on interest rate swaps. Total comprehensive income for the past three years (in thousands) was:
2005 | 2004 | 2003 | ||
$ 82,886 | $68,540 | $52,032 |
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
Accumulated other comprehensive income as presented on the Consolidated Balance Sheets consists of the following components (in thousands):
| Foreign Currency Translation | Unrealized Gain(Loss) on Interest Rate Swaps | Total | ||||||||||
Balance at December 31, 2003 | $ | 1,292 | $ | (17 | ) | $ | 1,275 | |||||
Net change | 1,582 | 17 | 1,599 | |||||||||
Balance at December 31, 2004 | 2,874 | — | 2,874 | |||||||||
Net change | (836 | ) | 101 | (735 | ) | |||||||
Balance at December 31, 2005 | $ | 2,038 | $ | 101 | $ | 2,139 | ||||||
Note 7 - Income Taxes
Income from continuing operations before the provision for income taxes is attributable to the following jurisdictions (in thousands):
| Year Ended December 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
United States | $ | 129,573 | $ | 104,224 | $ | 80,430 | |||
Foreign | 4,250 | 5,515 | 2,927 | ||||||
Total | $ | 133,823 | $ | 109,739 | $ | 83,357 | |||
The provision for income taxes consisted of the following (in thousands):
| Year Ended December 31, | |||||||||||
| 2005 | 2004 | 2003 | |||||||||
Current: | |||||||||||
Federal | $ | 49,977 | $ | 37,448 | $ | 28,140 | |||||
Foreign | 1,896 | 1,358 | 945 | ||||||||
Other, primarily state | 3,100 | 3,528 | 3,081 | ||||||||
| 54,973 | 42,334 | 32,166 | |||||||||
Deferred: | |||||||||||
Federal | (2,844 | ) | 793 | 317 | |||||||
Other, primarily state | (460 | ) | (329 | ) | 26 | ||||||
| (3,304 | ) | 464 | 343 | ||||||||
Total | $ | 51,669 | $ | 42,798 | $ | 32,509 | |||||
We made payments related to income taxes totaling $14.3 million in 2005 and $36.7 million in 2004. We have deferred our third and fourth quarter 2005 estimated federal tax payments as allowed by the Katrina Emergency Tax Relief Act of 2005 (the Act). These payments, which were originally deferred until February 2006 under the Act, will now be due in August 2006, as the Internal Revenue Service has postponed the payment deadline for affected taxpayers.
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
A reconciliation of the U.S. federal statutory tax rate to our effective tax rate on income before income taxes and equity earnings is as follows:
| Year Ended December 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
Federal statutory rate | 35.00 | % | 35.00 | % | 35.00 | % | |||
Other, primarily state income tax rate | 3.61 | 4.00 | 4.00 | ||||||
Total effective tax rate | 38.61 | % | 39.00 | % | 39.00 | % | |||
In 2005, we recorded equity earnings in LAC of $1.4 million, net of $0.9 million of income tax expense that is not reflected in the tables above.
The components of the deferred tax assets and liabilities are as follows (in thousands):
| December 31, | ||||||
| 2005 | 2004 | |||||
Deferred tax liabilities: | ||||||
Trade discounts on purchases | $ | 1,887 | $ | 3,851 | ||
Prepaid expenses | 1,171 | 2,145 | ||||
Allowance for doubtful accounts | 146 | 165 | ||||
Accumulated other comprehensive income | 1,342 | 1,843 | ||||
Other | 3,204 | 1,198 | ||||
Total current deferred tax liabilities | 7,750 | 9,202 | ||||
Intangible assets, primarily goodwill | 11,775 | 10,706 | ||||
Depreciation | — | 919 | ||||
Equity earnings in unconsolidated interests | 919 | — | ||||
Other | 1,906 | — | ||||
Total non-current deferred tax liabilities | 14,600 | 11,625 | ||||
Total deferred tax liabilities | 22,350 | 20,827 | ||||
Deferred tax assets: | ||||||
Product inventories | 3,078 | 2,075 | ||||
Accrued expenses | 843 | 265 | ||||
Other | 4,056 | — | ||||
Total current deferred tax assets | 7,977 | 2,340 | ||||
Leases | 751 | 642 | ||||
Depreciation | 52 | — | ||||
Other | 489 | — | ||||
Total non-current deferred tax assets | 1,292 | 642 | ||||
Total deferred tax assets | 9,269 | 2,982 | ||||
Deferred tax liabilities net of deferred tax assets | $ | 13,081 | $ | 17,845 | ||
As presented in the Consolidated Statements of Cash Flows, the change in deferred income taxes includes, among other items, the change in deferred income taxes related to the deferred income tax provision, the change between the deferred income taxes estimated for 2004 and actual deferred income taxes for 2004 and the change in deferred income taxes related to the estimated tax impact of accumulated other comprehensive income.
We reduce federal, state and foreign income taxes payable by the tax benefits associated with the exercise of stock options. We receive an income tax benefit based on the difference between the option exercise price and the fair market value of the stock at the time the option is exercised. This benefit, which we record in stockholders’ equity, was $14.1 million in 2005 and $3.9 million in 2004.
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
As of December 31, 2005, United States taxes were not provided on earnings of our foreign subsidiaries, as we have invested or expect to invest the undistributed earnings indefinitely. If in the future these earnings are repatriated to the United States, or if we determine that the earnings will be remitted in the foreseeable future, additional tax provisions may be required.
We hold, through our affiliates, cash balances in the countries in which we operate, including significant amounts held outside the United States. Most of the amounts held outside the United States could be repatriated to the United States, but, under current law, may be subject to United States federal income taxes, less applicable foreign tax credits. Repatriation of some foreign balances is restricted by local laws including the imposition of withholding taxes in some jurisdictions. We have not provided for the United States federal tax liability on these amounts and for financial statement purposes, these foreign cash balances are considered indefinitely reinvested outside the United States.
Note 8 - Earnings Per Share
The table below presents the reconciliation of basic and diluted weighted average number of shares outstanding and the related earnings per share calculation (in thousands):
| Year Ended December 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
Net income | $ | 83,621 | $ | 66,941 | $ | 50,848 | |||
Weighted average common shares outstanding: | |||||||||
Basic | 52,445 | 52,838 | 53,058 | ||||||
Effect of dilutive securities: | |||||||||
Stock options | 3,159 | 3,276 | 2,706 | ||||||
Restricted stock awards | 19 | 8 | — | ||||||
Employee stock purchase plan | 11 | 17 | 9 | ||||||
Diluted | 55,634 | 56,139 | 55,773 | ||||||
Note 9 - Commitments and Contingencies
We lease facilities for our corporate office, service centers, vehicles and equipment under non-cancelable operating leases that expire in various years through 2026. Most of our leases contain renewal options, some of which involve rate increases. For leases with step rent provisions whereby the rental payments increase incrementally over the life of the lease, we recognize the total minimum lease payments on a straight-line basis over the minimum lease term. The table below presents rent expense associated with operating leases for the past three years (in thousands):
2005 | 2004 | 2003 | ||
$ 43,513 | $38,513 | $34,071 |
The table below sets forth the approximate future minimum lease payments as of December 31, 2005 related to non-cancelable operating leases with initial terms of one year or more (in thousands):
2006 | 29,922 | |
2007 | 24,754 | |
2008 | 20,253 | |
2009 | 14,958 | |
2010 | 10,171 | |
Thereafter | 17,122 |
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
From time to time, we are subject to various claims and litigation arising in the ordinary course of business, including product liability, personal injury, commercial, contract and employment matters. While the outcome of any litigation is inherently unpredictable, we do not believe, based on currently available facts, that the ultimate disposition of any of these matters will have a material adverse impact on our financial condition, results of operations or cash flows.
Note 10 - Related Party Transactions
In May 2005, we acquired a 50% membership interest in NCC through a $1.1 million cash contribution. NCC owns and operates an office building in Covington, Louisiana. We lease corporate and administrative offices from NCC, occupying approximately 50,000 square feet of office space. We amended the lease agreement in May 2005. The amended agreement has a 10 year term and we pay rent of $56,600 per month.
In October 1999, we entered into a lease agreement with S&C Development, LLC for a service center in Mandeville, Louisiana. The sole member of S&C Development, LLC is A. David Cook, a POOL executive officer. The seven year lease term commenced on January 1, 2000, and we pay rent of $6,510 per month. In January 2002, we entered into a lease agreement with S&C Development, LLC for additional warehouse space adjacent to our Mandeville service center. The five year lease term commenced on February 4, 2002, and we pay rent of $4,123 per month. The total $10,633 monthly lease payment is for both facilities consisting of 21,100 square feet.
In January 2001, we entered into a lease agreement with S&C Development, LLC for a service center in Oklahoma City, Oklahoma. The ten year lease term commenced on November 10, 2001, and we pay rent of $12,745 per month for the 25,000 square foot facility.
In March 1997, we entered into a lease agreement with Kenneth St. Romain for a service center in Baton Rouge, Louisiana. Kenneth St. Romain is the son of Frank J. St. Romain, who was President and Chief Executive Officer of SCP until January 1999 and was a director of SCP until May 2003. In January 2002, we extended this lease for a second term of five years which commenced on March 1, 2002. We pay rent of $10,340 per month for the 23,500 square foot facility.
In May 2001, we entered into a lease agreement with Kenneth St. Romain for a service center in Jackson, Mississippi. The seven year lease term commenced on November 16, 2001, and we pay rent of $8,823 per month for the 20,000 square foot facility.
We believe the leases discussed above reflect fair market rates and are as favorable to us as we could have obtained from unrelated third parties. The table below presents rent expense associated with these leases for the past three years (in thousands):
2005 | 2004 | 2003 | ||
$ 946 | $501 | $493 |
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
Note 11 - Employee Benefit Plans
We offer a 401(k) savings and retirement plan, which provides benefits for substantially all employees who meet minimum age and length of service requirements. Eligible employees are able to contribute up to 25% of their base compensation, subject to the federal dollar limit. For plan participants, we contribute 50% of employee contributions up to 8% of their base compensation. We also provided a profit-sharing plan whereby, a profit-sharing contribution could be made annually to all eligible employees. Effective January 1, 2005, we eliminated the profit-sharing plan and increased the discretionary company matching contribution for the 401(k) plan to 8% as discussed above.
Effective March 1, 2005, we adopted the Pool Corp Deferred Compensation Plan, a nonqualified deferred compensation plan. The plan allows certain employees who occupy key management positions to defer salary and bonus amounts, and provides a matching contribution similar to that provided under our 401(k) plan to the extent that a participant’s contribution to the 401(k) plan are limited by IRS non-discrimination limitations. The total company matching contribution provided to a participant under the 401(k) plan and the Pool Corp Deferred Compensation Plan combined for any one year shall not exceed 4% of a participant’s salary and bonus.
The employee and Company sponsored contributions are invested in certain equity and fixed income securities based on individual employee elections.
The table below sets forth our matching contributions and profit-sharing contributions for the past three years (in thousands):
| 2005 | 2004 | 2003 | |||||||
Matching contributions 401(k) | $ | 2,244 | $ | 1,843 | $ | 2,365 | |||
Matching contributions deferred compensation plan | 77 | — | — | ||||||
Profit-sharing contributions | — | 1,280 | — | ||||||
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
Note 12 - Stock Option and Stock Purchase Plans
Stock options represent the right to purchase shares of our common stock in the future at a price that is fixed on the day the options are granted (the grant date).
The table below summarizes our stock option activity for the past three years (in thousands, except weighted average exercise price and fair value):
| 2005 | 2004 | 2003 | ||||||||||||||||
| Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | |||||||||||||
Outstanding - beginning of year | 7,474,859 | $ | 7.91 | 7,270,027 | $ | 6.35 | 6,720,193 | $ | 5.36 | |||||||||
Granted | 526,350 | 31.52 | 691,401 | 21.94 | 987,638 | 12.05 | ||||||||||||
Exercised | (1,124,241 | ) | 2.95 | (421,290 | ) | 3.53 | (374,191 | ) | 2.98 | |||||||||
Forfeitures | (80,281 | ) | 16.19 | (65,279 | ) | 11.31 | (63,613 | ) | 9.79 | |||||||||
Outstanding - end of year | 6,796,687 | 10.46 | 7,474,859 | 7.91 | 7,270,027 | 6.35 | ||||||||||||
Exercisable at end of year | 3,643,944 | 5.62 | 3,593,055 | 4.06 | 3,114,395 | 3.66 | ||||||||||||
Weighted average fair value of options granted during the year | 11.34 | 9.67 | 4.97 | |||||||||||||||
The table below summarizes information about stock options outstanding and exercisable at December 31, 2005:
| Outstanding Stock Options | Exercisable Stock Options | |||||||||||
| Range of exercise prices | Shares | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||
$ 0.00 to $ 5.99 | 2,652,801 | 3.13 years | $ | 3.19 | 2,601,160 | $ | 3.26 | |||||
$ 6.00 to $ 11.99 | 2,167,809 | 5.97 years | 10.07 | 624,750 | 9.24 | |||||||
$ 12.00 to $ 17.99 | 798,526 | 6.16 years | 12.52 | 323,534 | 12.72 | |||||||
$ 18.00 to $ 23.99 | 622,801 | 8.11 years | 21.67 | 81,750 | 21.67 | |||||||
$ 24.00 to $ 29.99 | 36,500 | 8.51 years | 26.68 | 12,750 | 26.91 | |||||||
$ 30.00 to $ 34.93 | 518,250 | 9.12 years | 31.52 | — | — | |||||||
$ 0.00 to $ 34.93 | 6,796,687 | 5.72 years | 10.46 | 3,643,944 | 5.62 | |||||||
Under the 1995 Stock Option Plan (the 1995 Plan) our Board of Directors (the Board) was authorized to grant stock options to employees, agents, consultants or independent contractors. These options generally were exercisable two years after the grant date, and they expire ten years from the grant date. In May 1998, the Board suspended the 1995 Plan. Options granted prior to the suspension were not affected by this action.
In May 1998, our stockholders approved the 1998 Stock Option Plan (the 1998 Plan), which authorized the Board to grant stock options, stock appreciation rights, restricted stock and performance awards to employees, agents, consultants or independent contractors. These options generally were exercisable three or more years after the grant date, and they expire ten years after the grant date. In May 2002, the Board suspended the 1998 Plan. Options granted prior to the suspension were not affected by this action.
SCP POOL CORPORATION
Notes to Consolidated Financial Statements (continued)
In May 2002, our stockholders approved the 2002 Long-Term Incentive Plan (the 2002 Plan), which authorized the Board to grant stock options and restricted stock awards to employees, agents, consultants or independent contractors. In May 2004, our stockholders approved an amendment to increase the number of shares authorized for issuance under the 2002 Plan from 1,575,000 to 2,700,000 shares. In 2005, we granted 475,350 options under the 2002 Plan. As of December 31, 2005, 767,340 shares were available for grant. Granted options have an exercise price equal to our stock’s market price on the grant date. These options generally may be exercised three or more years after the grant date, and they expire ten years after the grant date. No restricted shares were granted in 2005.
The SCP Pool Corporation Non-Employee Directors Equity Incentive Plan permits the Board to grant stock options to each non-employee director. No more than 1,350,000 shares may be issued under this plan. In 2005, we granted 51,000 options to the non-employee directors. As of December 31, 2005, 175,896 shares were available for grant. The exercise price of the granted options is equal to our stock’s market price on the grant date. The options generally may be exercised one year after the grant date, and they expire ten years after the grant date.
In March 1998, the Board adopted the SCP Pool Corporation Employee Stock Purchase Plan. Under this plan, employees who meet minimum age and length of service requirements may purchase stock at 85% of the lower of:
| a. | the closing price of our common stock at the end of a six month period ending either June 30 or December 31; or |
| b. | the average of the beginning and ending closing prices of our common stock for such six month period. |
No more than 956,250 shares of our common stock may be issued under this plan. In 2005, we issued 43,538 shares under this plan, and 582,508 shares remained available at December 31, 2005.
Note 13 - Quarterly Financial Data (Unaudited)
The table below summarizes the unaudited quarterly operating results of operations for the past two years (in thousands, except per share data):
| Quarter | |||||||||||||||||||||||||
| 2005 | 2004 | ||||||||||||||||||||||||
| First | Second | Third | Fourth | First | Second | Third | Fourth | ||||||||||||||||||
Net sales | $ | 265,161 | $ | 563,978 | $ | 423,729 | $ | 299,791 | $ | 234,648 | $ | 504,177 | $ | 362,091 | $ | 209,937 | |||||||||
Gross profit | 71,951 | 162,681 | 114,605 | 83,211 | 65,032 | 145,215 | 104,183 | 56,404 | |||||||||||||||||
Net income (loss) | 4,753 | 51,640 | 27,120 | 108 | 4,080 | 43,595 | 22,010 | (2,744 | ) | ||||||||||||||||
Net income (loss) per share: | |||||||||||||||||||||||||
Basic | $ | 0.09 | $ | 0.98 | $ | 0.51 | $ | 0.00 | $ | 0.08 | $ | 0.82 | $ | 0.42 | $ | (0.05 | ) | ||||||||
Diluted | $ | 0.09 | $ | 0.93 | $ | 0.49 | $ | 0.00 | $ | 0.07 | $ | 0.77 | $ | 0.39 | $ | (0.05 | ) | ||||||||
The sum of diluted earnings per share for each of the quarters may not equal the total diluted earnings per share for the annual period because there is a difference in the way that in-the-money stock options are considered from quarter to quarter under the requirements of SFAS 128,Earnings per Share.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Act). The rules refer to the controls and other procedures designed to ensure that information required to be disclosed in reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified. As of December 31, 2004,2005, management, including the CEO and CFO, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management, including the CEO and CFO, concluded that as of December 31, 2004,2005, our disclosure controls and procedures were effective at ensuring that material information related to us or our consolidated subsidiaries is made known to them and is disclosed on a timely basis in our reports filed under the Act.
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 significant changes in our internal control over financial reporting occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
POOL’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control system was designed to provide reasonable assurance to POOL’s management and Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Any evaluation or projection of effectiveness to future periods is also subject to risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
POOL’s management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004.2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control-Integrated Framework.Based on this assessment, management has concluded that, as of December 31, 2004,2005, POOL’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
In October 2005, we acquired Automatic Rain Company through our newly formed and wholly owned subsidiary Horizon Distributors, Inc. In conducting its assessment of internal controls over financial reporting as of December 31, 2005, POOL’s management did not include the internal controls of Horizon Distributors, Inc. which constituted 8% and 14% of total and net assets, respectively, as of December 31, 2005 and 3% of net sales for the year then ended.
The registered public accounting firm that audited the consolidated financial statements included on pages F-3 – F-28in Item 8 of this Form 10-K has issued an attestation report on management’s assessment of POOL’s internal controls over financial reporting. This report appears below.
35
SCP POOL CORPORATION
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of SCP Pool Corporation
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that SCP Pool Corporation maintained effective internal control over financial reporting as of December 31, 2004,2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). SCP Pool Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Horizon Distributors, Inc. which is included in the 2005 consolidated financial statements of SCP Pool Corporation and constituted 8% and 14% of total and net assets, respectively, as of December 31, 2005 and 3% of net sales for the year then ended. Our audit of internal control over financial reporting of SCP Pool Corporation also did not include an evaluation of the internal control over financial reporting of Horizon Distributors, Inc.
In our opinion, management’s assessment that SCP Pool Corporation maintained effective internal control over financial reporting as of December 31, 2004,2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, SCP Pool Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004,2005, based onthe COSO criteria.criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of SCP Pool Corporation as of December 31, 20042005 and 2003,2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 20042005 of SCP Pool Corporation and our report dated February 25, 2005March 3, 2006 expressed an unqualified opinion thereon.
ERNST/s/ Ernst & YOUNGYoung LLP
February 25, 2005New Orleans, Louisiana
March 3, 2006
36
SCP POOL CORPORATION
|
|
Not applicable.
Part III.Item 10. Directors and Executive Officers of the Registrant
|
|
Incorporated by reference to the Company’s 2005POOL’s 2006 Proxy Statement to be filed with the SEC.
|
Incorporated by reference to the Company’s 2005POOL’s 2006 Proxy Statement to be filed with the SEC.
Item 12. Security Ownership of Certain Beneficial Owners and Management |
|
Incorporated by reference to the Company’s 2005POOL’s 2006 Proxy Statement to be filed with the SEC.
|
Incorporated by reference to the Company’s 2005POOL’s 2006 Proxy Statement to be filed with the SEC.
|
Incorporated by reference to the Company’s 2005POOL’s 2006 Proxy Statement to be filed with the SEC.
Item 15. Exhibits, Financial Statement Schedules
37
SCP POOL CORPORATION
Part IV.
|
|
| (1) | Consolidated Financial Statements: |
| Page | ||
| 30 | ||
| 31 | ||
| 32 | ||
| 33 | ||
| 35 | ||
Notes to Consolidated Financial Statements | 36 | |
| (2) |
| |
| Financial Statement Schedules. | |
All schedules are omitted because they are not applicable or are not required
or because the required information is provided in our Consolidated Financial
Statements or accompanying Notes included in Item 8 of this Form 10-K.
| (3) |
| |
| ||
| ||
| The exhibits listed in the Index to the Exhibits. | |
38
SCP POOL CORPORATION
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
F-1
SCP POOL CORPORATION
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of SCP Pool Corporation
We have audited the accompanying consolidated balance sheets of SCP Pool Corporation as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the index at Item 15a2. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SCP Pool Corporation at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2005 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
New Orleans, Louisiana
February 25, 2005
F-2
SCP POOL CORPORATION
Consolidated Balance Sheets |
|
|
|
|
| ||
(In thousands, except share data) |
| December 31, | |||||
|
|
|
| 2004 |
| 2003 |
|
Assets |
|
|
|
|
|
| |
Current assets |
|
|
|
|
| ||
| Cash and cash equivalents | $ | 21,762 | $ | 12,812 |
| |
| Receivables, net |
| 33,887 |
| 25,728 |
| |
| Receivables pledged under receivables facility |
| 63,702 |
| 58,096 |
| |
| Product inventories, net |
| 195,787 |
| 193,905 |
| |
| Prepaid expenses |
| 6,057 |
| 3,991 |
| |
| Deferred income taxes |
| 2,340 |
| 1,864 |
| |
Total current assets | $ | 323,535 | $ | 296,396 |
| ||
|
|
|
|
|
|
|
|
Property and equipment, net |
| 18,595 |
| 24,643 |
| ||
Goodwill |
| 104,684 |
| 112,140 |
| ||
Other intangible assets, net |
| 12,620 |
| 14,631 |
| ||
Investments |
| 18,616 |
| — |
| ||
Other assets, net |
| 2,816 |
| 2,462 |
| ||
Total assets | $ | 480,866 | $ | 450,272 |
| ||
Liabilities and stockholders’ equity |
|
|
|
|
| ||
Current liabilities |
|
|
|
|
| ||
| Accounts payable |
| 113,114 |
| 118,312 |
| |
| Accrued and other current liabilities |
| 38,287 |
| 35,386 |
| |
| Short-term financing |
| 42,595 |
| 42,418 |
| |
| Current portion of long-term debt |
| 1,350 |
| 40,250 |
| |
Total current liabilities | $ | 195,346 | $ | 236,366 |
| ||
|
|
|
|
|
|
|
|
Deferred income taxes |
| 11,625 |
| 10,569 |
| ||
Long-term debt, less current portion |
| 50,420 |
| 3,607 |
| ||
Other long-term liabilities |
| 3,140 |
| 4,489 |
| ||
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
|
|
| ||
| Common stock, $.001 par value; 100,000,000 shares |
|
|
|
|
| |
|
| authorized; 52,186,711 and 53,222,003 shares |
|
|
|
|
|
|
| issued and outstanding at December 31, 2004 |
|
|
|
|
|
|
| and 2003, respectively |
| 52 |
| 53 |
|
| Additional paid-in capital |
| 76,729 |
| 67,844 |
| |
| Retained earnings |
| 141,772 |
| 126,359 |
| |
| Unearned compensation |
| (1,092) |
| (290) |
| |
| Accumulated other comprehensive income |
| 2,874 |
| 1,275 |
| |
Total stockholders’ equity | $ | 220,335 | $ | 195,241 |
| ||
Total liabilities and stockholders’ equity | $ | 480,866 | $ | 450,272 |
| ||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-3
SCP POOL CORPORATION
Consolidated Statements of Income |
|
|
|
|
|
|
| |
(In thousands, except per share data) |
| Year Ended December 31, | ||||||
|
|
| 2004 |
| 2003 |
| 2002 |
|
Net sales | $ | 1,310,853 | $ | 1,155,832 | $ | 983,246 |
| |
Cost of sales |
| 940,019 |
| 840,694 |
| 727,714 |
| |
| Gross profit | $ | 370,834 | $ | 315,138 | $ | 255,532 |
|
Selling and administrative expenses |
| 257,240 |
| 227,112 |
| 182,845 |
| |
| Operating income | $ | 113,594 | $ | 88,026 | $ | 72,687 |
|
Interest expense |
| 3,855 |
| 4,669 |
| 4,977 |
| |
Income before income taxes | $ | 109,739 | $ | 83,357 | $ | 67,710 |
| |
Provision for income taxes |
| 42,798 |
| 32,509 |
| 26,407 |
| |
Net income | $ | 66,941 | $ | 50,848 | $ | 41,303 |
| |
Earnings per share |
|
|
|
|
|
|
| |
Basic | $ | 1.27 | $ | 0.96 | $ | 0.76 |
| |
Diluted | $ | 1.19 | $ | 0.91 | $ | 0.72 |
| |
Weighted average shares outstanding |
|
|
|
|
|
|
| |
Basic |
| 52,838 |
| 53,058 |
| 54,521 |
| |
Diluted |
| 56,139 |
| 55,773 |
| 57,432 |
| |
Cash dividends declared per common share | $ | 0.20 | $ | — | $ | — |
| |
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-4
SCP POOL CORPORATION
Consolidated Statements of Stockholders’ Equity
|
|
|
|
|
| |||||||||
(In thousands; amounts in Dollars except share data) |
|
|
|
|
| Accumulated |
| |||||||
|
|
|
|
|
|
|
|
| Additional |
|
| Other |
| |
|
|
|
| Common Stock |
| Treasury | Paid-In | Unearned | Retained | Comprehensive |
| |||
|
|
|
| Shares |
| Amount |
| Stock | Capital | Compensation | Earnings | Income (Loss) | Total | |
Balance at December 31, 2001 |
| 60,675 |
| 59 |
| (27,567) | 61,321 | (909) | 112,611 | (943) | 144,572 | |||
| Net income |
| — |
| — |
| — | — | — | 41,303 | — | 41,303 | ||
| Foreign currency translation |
| — |
| — |
| — | — | — | — | 372 | 372 | ||
| Interest rate swaps |
| — |
| — |
| — | — | — | — | 662 | 662 | ||
| Comprehensive income, net of tax |
| — |
| — |
| — | — | — | — | — | 42,337 | ||
| Treasury stock, 4,082 shares of |
|
|
|
|
|
|
|
|
|
|
| ||
|
| common stock |
| — |
| — |
| (47,504) | — | — | — | — | (47,504) | |
| Retirement of treasury shares |
| (8,577) |
| (6) |
| 75,071 | — | — | (75,067) | — | — | ||
| Unearned compensation |
| — |
| — |
| — | — | 334 | — | — | 334 | ||
| Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
| ||
|
| including tax benefit of $996 |
| 234 |
| — |
| — | 1,616 | — | — | — | 1,616 | |
| Employee stock purchase plan |
| 50 |
| — |
| — | 495 | — | — | — | 495 | ||
| Conversion of convertible debt |
| 706 |
| — |
| — | 91 | — | — | — | 91 | ||
Balance at December 31, 2002 |
| 53,088 |
| 53 |
| — | 63,525 | (575) | 78,847 | 91 | 141,941 | |||
| Net income |
| — |
| — |
| — | — | — | 50,848 | — | 50,848 | ||
| Foreign currency translation, |
|
|
|
|
|
|
|
|
|
|
| ||
|
| net of tax of $763 |
| — |
| — |
| — | — | — | — | 1,201 | 1,201 | |
| Interest rate swaps, net of tax of $11 |
| — |
| — |
| — | — | — | — | (17) | (17) | ||
| Comprehensive income, net of tax |
| — |
| — |
| — | — | — | — | — | 52,032 | ||
| Treasury stock, 288 shares of |
|
|
|
|
|
|
|
|
|
|
| ||
|
| common stock |
| — |
| — |
| (3,336) | — | — | — | — | (3,336) | |
| Retirement of treasury shares |
| (288) |
| — |
| 3,336 | — | — | (3,336) | — | — | ||
| Unearned compensation |
| — |
| — |
| — | — | 285 | — | — | 285 | ||
| Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
| ||
|
| including tax benefit of $2,107 |
| 372 |
| — |
| — | 3,755 | — | — | — | 3,755 | |
| Employee stock purchase plan |
| 50 |
| — |
| — | 564 | — | — | — | 564 | ||
Balance at December 31, 2003 |
| 53,222 |
| 53 |
| — | 67,844 | (290) | 126,359 | 1,275 | 195,241 | |||
| Net income |
| — |
| — |
| — | — | — | 66,941 | — | 66,941 | ||
| Foreign currency translation, |
|
|
|
|
|
|
|
|
|
|
| ||
|
| net of tax of $1,011 |
| — |
| — |
| — | — | — | — | 1,582 | 1,582 | |
| Interest rate swaps, net of tax of $11 |
| — |
| — |
| — | — | — | — | 17 | 17 | ||
| Comprehensive income, net of tax |
| — |
| — |
| — | — | — | — | — | 68,540 | ||
| Treasury stock,1,568 shares of |
|
|
|
|
|
|
|
|
|
|
| ||
|
| common stock |
| — |
| — |
| (40,823) | — | — | — | — | (40,823) | |
| Retirement of treasury shares |
| (1,568) |
| (1) |
| 40,823 | — | — | (40,822) | — | — | ||
| Unearned compensation |
| — |
| — |
| — | — | (802) | — | — | (802) | ||
| Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
| ||
|
| including tax benefit of $3,886 |
| 419 |
| — |
| — | 6,512 | — | — | — | 6,512 | |
| Declaration of cash dividends |
| — |
| — |
| — | — | — | (10,706) | — | (10,706) | ||
| Issuance of restricted stock |
| 55 |
| — |
| — | 1,226 | — | — | — | 1,226 | ||
| Employee stock purchase plan |
| 58 |
| — |
| — | 1,147 | — | — | — | 1,147 | ||
Balance at December 31, 2004 |
| 52,186 |
| 52 |
| — | 76,729 | (1,092) | 141,772 | 2,874 | 220,335 | |||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-5
SCP POOL CORPORATION
Consolidated Statements of Cash Flows |
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(In thousands) |
| Year Ended December 31, | |||||||||
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| 2004 |
| 2003 |
| 2002 |
|
Operating activities |
|
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|
|
|
|
| ||||
Net income |
|
| $ | 66,941 | $ | 50,848 | $ | 41,303 |
| ||
Adjustments to reconcile net income to net cash |
|
|
|
|
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|
| ||||
| provided by operating activities |
|
|
|
|
|
|
| |||
|
| Depreciation and amortization |
| 10,275 |
| 8,940 |
| 6,842 |
| ||
|
| Provision for doubtful accounts receivable, net of write-offs |
| (774) |
| 544 |
| 522 |
| ||
|
| Provision for inventory obsolescence, net of write-offs |
| (51) |
| 16 |
| (821) |
| ||
|
| Change in deferred income taxes |
| 703 |
| 7,456 |
| 5,937 |
| ||
|
| Loss on sale of property and equipment |
| 43 |
| 329 |
| 70 |
| ||
|
| Changes in operating assets and liabilities, |
|
|
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|
|
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| ||
|
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| net of effects of acquisitions and divestitures |
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|
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| |
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|
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| Receivables |
| (12,879) |
| (4,976) |
| 6,086 |
|
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| Product inventories |
| (2,681) |
| 2,030 |
| 16,635 |
|
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|
|
| Prepaid expenses and other assets |
| (2,405) |
| (1,307) |
| 1,312 |
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| Accounts payable |
| (6,880) |
| 16,322 |
| (18,306) |
|
|
|
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| Accrued expenses and other current liabilities |
| 3,660 |
| (2,068) |
| (1,418) |
|
Net cash provided by operating activities |
| 55,952 |
| 78,134 |
| 58,162 |
| ||||
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Investing activities |
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|
|
| ||||
Acquisition of businesses, net of cash acquired |
| (644) |
| (21,772) |
| (45,350) |
| ||||
Equity interest investment |
| (6,961) |
| — |
| — |
| ||||
Purchase of property and equipment, net of sale proceeds |
| (6,063) |
| (8,351) |
| (6,416) |
| ||||
Net cash used in investing activities |
| (13,668) |
| (30,123) |
| (51,766) |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
| ||||
Proceeds from revolving line of credit |
| 340,104 |
| 195,800 |
| 209,748 |
| ||||
Payments on revolving line of credit |
| (328,584) |
| (282,075) |
| (169,573) |
| ||||
Proceeds from asset-backed financing |
| 66,522 |
| 102,270 |
| — |
| ||||
Payments on asset-backed financing |
| (66,345) |
| (62,029) |
| — |
| ||||
Proceeds from other long-term debt |
| — |
| 3,711 |
| — |
| ||||
Payments on other long-term debt |
| (2,023) |
| (1,014) |
| — |
| ||||
Issuance of common stock under stock option plans |
| 6,917 |
| 4,322 |
| 2,108 |
| ||||
Payment of cash dividends |
| (10,706) |
| — |
| — |
| ||||
Purchase of treasury stock |
| (40,823) |
| (3,336) |
| (47,505) |
| ||||
Net cash used in financing activities |
| (34,938) |
| (42,351) |
| (5,222) |
| ||||
Effect of exchange rate changes on cash |
| 1,604 |
| 2,020 |
| 434 |
| ||||
Increase in cash and cash equivalents |
| 8,950 |
| 7,680 |
| 1,608 |
| ||||
Cash and cash equivalents at beginning of year |
| 12,812 |
| 5,132 |
| 3,524 |
| ||||
Cash and cash equivalents at end of year | $ | 21,762 | $ | 12,812 | $ | 5,132 |
| ||||
F-6
SCP POOL CORPORATION
Consolidated Statements of Cash Flows (continued)
Supplemental cash flow information |
| Year Ended December 31, | |||||||
|
| 2004 |
| 2003 |
| 2002 | |||
Cash paid during the year for |
|
|
|
|
|
| |||
|
| Interest |
| $ | 2,965 | $ | 3,256 | $ | 4,282 |
|
| Income taxes, net of refunds |
| 36,053 |
| 24,883 |
| 18,738 | |
Non-cash financing and investing transactions |
|
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|
|
|
| |||
|
| Convertible note exchanged for stock |
| — |
| — |
| 91 | |
As more fully described in Note 3 to the Consolidated Financial Statements, in December 2004, we exchanged certain assets and cash consideration for the assets of Pool Tech Distribution Inc. and a 42% interest in Latham Acquisition Corporation. In conjunction with this transaction, we acquired and divested assets and liabilities as follows (in thousands):
Assets acquired | $ | 32,473 |
Liabilities assumed |
| 4,119 |
Assets divested |
| 28,287 |
Liabilities divested |
| 6,894 |
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-7
SCP POOL CORPORATION
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Description of Business
As of December 31, 2004, SCP Pool Corporation and its wholly-owned subsidiaries (the SIGNATURESCompany, which may be referred to as POOL, we, us or our), maintained 201 service centers in North America and Europe from which we sell swimming pool equipment, parts and supplies to pool builders, retail stores and service companies. We distribute products through two networks: The SCP Distributors network (SCP) and the Superior Pool Products (Superior) network.
Net sales by geographic region were as follows (in thousands):
|
| 2004 |
| 2003 |
| 2002 |
United States | $ | 1,226,654 | $ | 1,094,035 | $ | 945,357 |
International |
| 84,199 |
| 61,797 |
| 37,889 |
| $ | 1,310,853 | $ | 1,155,832 | $ | 983,246 |
Property and equipment by geographic region were as follows (in thousands):.
|
| 2004 |
| 2003 |
| 2002 |
United States | $ | 16,214 | $ | 22,535 | $ | 19,996 |
International |
| 2,381 |
| 2,108 |
| 925 |
| $ | 18,595 | $ | 24,643 | $ | 20,921 |
Basis of Presentation and Principles of Consolidation
We prepared the consolidated financial statements following accounting principles generally accepted in the United States (GAAP) and the requirements of the Securities and Exchange Commission (SEC). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results.
The consolidated financial statements include the accounts of SCP Pool Corporation and our wholly-owned subsidiaries. We eliminated all significant intercompany accounts and transactions among our wholly-owned subsidiaries.
As of December 31, 2004, we have a 42% investment in Latham Acquisition Corporation (LAC), which we account for using the equity method of accounting. Accordingly, we report our share of income or loss based on our ownership interest in LAC. Equity earnings were not material in 2004.
Use of Estimates
In order to prepare financial statements that conform to GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Our most significant estimates are those relating to the allowance for doubtful accounts, the inventory reserve and the reserve for tax contingencies. We continually review our estimates and make adjustments as necessary, but actual results could be significantly different from what we expected when we made these estimates.
F-8
SCP POOL CORPORATION
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Segment Reporting
Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for the way that public companies report information about operating segments in annual financial statements and establishes standards for related disclosures about products and services, geographic areas and major customers. We have reviewed SFAS 131 and determined that we have a single reportable segment.
Seasonality and Weather
Our business is highly seasonal, and weather is the principal external factor affecting our business. The table below presents some of the possible effects resulting from various weather conditions:
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In general, sales and net income are highest during the second and third quarters, which represent the peak months of swimming pool use and installation. Sales are substantially lower during the first and fourth quarters when we may incur net losses. For further discussion, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Stock Split
In August 2004, our Board of Directors declared a three-for-two stock split of our common stock, which was paid in the form of a stock dividend on September 10, 2004 to the stockholders of record at the close of business on August 23, 2004. Accordingly, all share and per share data and the related capital amounts for all periods presented reflect the effects of this split.
F-9
SCP POOL CORPORATION
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Earnings Per Share
In accordance with SFAS 128, Earnings per Share, we calculate basic earnings per share by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share includes the dilutive effects of stock awards.
Financial Instruments
The carrying values of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments. The carrying amount of long-term debt approximates fair value as it bears interest at variable rates.
Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Credit Risk and Allowance for Doubtful Accounts
We record our trade receivables at the invoiced amount less an allowance for doubtful accounts for estimated losses if our customers do not make required payments. We perform periodic credit evaluations of our customers and we typically do not require collateral. Consistent with industry practices, we require payment from our customers within 30 days except for sales under early-buy programs for which we provide extended payment terms to qualified customers. In the past, credit losses have been within our expectations.
Product Inventories and Reserve for Inventory Obsolescence and Shrink
Product inventories consist primarily of goods we purchase from manufacturers and intend to sell to our customers. We record inventory at the lower of cost, using the average cost method, or market. We establish our reserve for inventory obsolescence based on inventory turns by category with particular emphasis on stock keeping units with the least sales over the previous 12 months. The reserve is intended to reflect the value of inventory that we may not be able to sell at a profit.
In evaluating the adequacy of our reserve for inventory obsolescence and shrink at the service center level, we consider a combination of factors including:
the level of inventory in relationship to historical sales by product, including inventory usage by class based on product sales at both the service center and Company levels;
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Our reserve for inventory obsolescence may periodically require adjustment as changes occur in the above-identified factors.
F-10
SCP POOL CORPORATION
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We account for vendor rebates in accordance with the Emerging Issues Task Force Issue 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor. Many of our arrangements with our vendors provide for us to receive a rebate of a specified amount of consideration, payable to us when we achieve any of a number of measures, generally related to the volume level of purchases from our vendors. We account for such rebates as a reduction of the prices of the vendor’s products and therefore as a reduction of inventory until we sell the product, at which time such rebates reduce cost of sales in our income statement. Throughout the year, we estimate the amount of the rebate earned based on our estimate of purchases to date relative to the purchase levels that mark our progress toward earning the rebates. We continually revise these estimates to reflect actual rebates earned based on actual purchase levels.
Property and Equipment
Property and equipment are stated at cost. We depreciate property and equipment on a straight-line basis over the following estimated useful lives:
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The table below presents depreciation expense for the past three years (in thousands):
| 2004 |
| 2003 |
| 2002 |
$ | 5,898 | $ | 5,592 | $ | 4,203 |
Goodwill and Other Intangible Assets
Goodwill represents the excess of the amount we paid to acquire a company over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. We account for goodwill under the provisions of SFAS 142, Goodwill and Other Intangible Assets. In accordance with these rules, we test goodwill for impairment annually or at any other time when impairment indicators exist. Under the provisions of SFAS 142, we amortize our intangible assets consisting of non-compete agreements and a distribution agreement because they have finite lives.
For additional discussion of goodwill and other intangible assets, see Note 2 to the Consolidated Financial Statements.
Self Insurance
We retain certain self-insurance risks for both health benefits and property and casualty insurance programs. We have limited our exposure by maintaining excess and aggregate liability coverage. We establish self-insurance reserves based on claims filed and estimates of claims incurred but not reported. The estimates are based on information provided to us by the claims administrators.
F-11
SCP POOL CORPORATION
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Advertising Costs
We expense advertising costs when incurred. The table below presents advertising expense for the past three years (in thousands)
:
| 2004 |
| 2003 |
| 2002 |
$ | 6,830 | $ | 7,106 | $ | 4,927 |
Income Taxes
We record deferred tax assets or liabilities based on differences between financial reporting and tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when we expect the differences to reverse. Due to changing tax laws and state income tax rates, significant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future.
Stock Compensation Arrangements
Under the provisions of SFAS 123, Accounting for Stock-Based Compensation, companies may account for employee stock options and stock equity grants using either (i) SFAS 123’s fair value method or (ii) the intrinsic value method provided by APB 25, Accounting for Stock Issued to Employees. Under the SFAS 123 fair value method, companies recognize compensation expense related to employee stock options based on the fair value of the options on the grant date as estimated by an option pricing model. The intrinsic value method prescribed by APB 25 requires recognition of compensation expense over the option vesting period when the exercise price of the granted options is less than the stock’s market price on the grant date. Under both methods, stock equity grants are recognized as compensation expense over the grant vesting period based on the fair value of the grant at time of issuance.
We account for our employee stock options under the intrinsic value method described by APB 25. Accordingly, we do not record compensation expense for options issued with an exercise price equal to the stock’s market price on the grant date. The table below presents pre-tax compensation expense for stock options with a five year vesting period granted below market price in 1999, 2000 and 2001 (in thousands):
| 2004 |
| 2003 |
| 2002 |
$ | 184 | $ | 286 | $ | 334 |
F-12
SCP POOL CORPORATION
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If we had accounted for our stock-based compensation using the fair value method described in SFAS 123, our net income and earnings per share would have been reduced to the pro-forma amounts below (in thousands, except per share data):
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| Year Ended December 31, | ||||||
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| 2004 |
| 2003 |
| 2002 |
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Reported net income | $ | 66,941 | $ | 50,848 | $ | 41,303 |
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Add: | Stock-based employee compensation |
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| expense included in reported net |
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| income, net of the tax effect |
| 537 |
| 523 |
| 204 |
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Deduct: | Stock-based employee compensation |
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| expense determined under the fair |
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| value method for all awards, |
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| net of the tax effect |
| (3,672) |
| (2,888) |
| (2,350) |
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Pro-forma net income | $ | 63,806 | $ | 48,483 | $ | 39,157 |
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Basic earnings per share |
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| As reported | $ | 1.27 | $ | 0.96 | $ | 0.76 |
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| Pro-forma | $ | 1.21 | $ | 0.91 | $ | 0.72 |
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Diluted earnings per share |
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| As reported | $ | 1.19 | $ | 0.91 | $ | 0.72 |
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| Pro-forma | $ | 1.14 | $ | 0.87 | $ | 0.68 |
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For purposes of pro-forma disclosures, the estimated fair value of employee options is ratably expensed over the options’ vesting period. We estimated the fair value of these options at the grant date using a Black-Scholes option pricing model with the following weighted average assumptions:
| December 31, | |||||
| 2004 |
| 2003 |
| 2002 |
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Risk-free interest rate | 3.87 | % | 3.38 | % | 4.98 | % |
Expected dividend yield | — |
| — |
| — |
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Expected volatility | 0.35 |
| 0.33 |
| 0.35 |
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Weighted average expected life | 7.0 | years | 7.0 | years | 8.0 | years |
The Black-Scholes option valuation model was developed to estimate the fair value of traded options that have no vesting restrictions and are fully transferable. Additionally, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. In our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options because:
1.the characteristics of our employee stock options are significantly different from those of traded options; and
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F-13
In December 2004, the FASB issued SFAS 123(R), Share-Based Payment. This new standard will require companies to recognize compensation cost for stock options and other stock-based awards based on their value as measured on the grant date. The new standard prohibits companies from accounting for
F-14
SCP POOL CORPORATION
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stock-based compensation under the provisions of APB 25. We are required to adopt SFAS 123(R) on July 1, 2005, although earlier adoption is permitted. Upon adoption, two transition methods are available. Under the modified-prospective, method companies will be required to apply the provisions of SFAS 123(R) to all share-based payments that are granted, modified or settled after the date of adoption. Under the modified-retrospective transition method, companies may restate prior periods by recognizing compensation cost in the amounts previously reported in the pro-forma footnote disclosures required by SFAS 123. New awards and unvested awards would be accounted for in the same manner as the modified-prospective method.
We are in the process of reviewing the provisions of SFAS 123(R), and currently we have made no definitive decisions regarding the possibility of early adoption. We are also in the process of evaluating the transition methods and option valuation models available. In 2005, we expect the annualized impact from SFAS 123(R) to our diluted earnings per share will approximate $0.05 to $0.06.
Revenue Recognition
We recognize revenue in accordance with SEC Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements, and the appropriate amendments. SAB 101 requires that four basic criteria must be met before we can recognize revenue:
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We record revenue when customers take delivery of products. Customers may pick up products at any service center location, or products may be delivered via our trucks or third party carriers. Products shipped via third party carriers are considered delivered based on the shipping terms, which are generally FOB shipping point.
Derivatives and Hedging Activities
We recognize all derivatives at fair value on the balance sheet. The effective portion of changes in the fair value of derivatives qualifying as cash flow hedges are recognized in other comprehensive income until the hedged item is recognized in earnings, or until it becomes unlikely that the hedged transaction will occur. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.
In May 2003, we entered into an interest rate swap agreement as a cash flow hedge to reduce our exposure to fluctuations in interest rates. Any difference paid or received on the interest rate swap was recognized as an adjustment to interest expense over the life of the swap. The swap became effective September 30, 2003 and terminated on May 28, 2004. We had no derivatives outstanding at December 31, 2004.
F-15
SCP POOL CORPORATION
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Shipping and Handling Costs
We include shipping and handling fees billed to customers in net sales, and we record shipping and handling costs associated with inbound freight as cost of sales. The table below presents shipping and handling costs associated with outbound freight, which we include in selling, general and administrative expenses (in thousands):
| 2004 |
| 2003 |
| 2002 |
$ | 23,261 | $ | 19,908 | $ | 15,703 |
Reclassifications
We reclassified certain deferred tax amounts in our 2003 Consolidated Balance Sheet to conform to the 2004 presentation. This reclassification had no effect on net income or earnings per share as previously reported.
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In October 2004, we performed our annual goodwill impairment test, which requires comparison of our Company’s estimated fair value to the book value, including goodwill. In accordance with SFAS 142, Goodwill and Other Intangible Assets, we also tested goodwill for impairment as of December 31, 2004 because we disposed of goodwill in connection with the divestiture of our manufacturing facilities in Fort Wayne, Indiana and Quebec, Canada. As a result of these tests, we believe the goodwill on our balance sheet is not impaired.
We amortize non-compete agreements and a distribution agreement using the straight-line method over the contractual term of the agreement.
The changes in the carrying amount of goodwill are as follows (in thousands):
Balance at December 31, 2002 | $ | 107,739 |
Acquired goodwill |
| 4,401 |
Balance at December 31, 2003 |
| 112,140 |
Acquired goodwill |
| 4,728 |
Purchase price adjustments |
| 672 |
Goodwill disposal |
| (12,856) |
Balance at December 31, 2004 | $ | 104,684 |
We recorded purchase price adjustments in 2004 related to acquisitions completed in 2003. These adjustments related primarily to additional payments we made in connection with the Quebec Acquisition in May 2003. We made these payments in accordance with the original purchase agreement, under which a portion of the purchase price was contingent upon the future operating results of the acquired service centers.
F-16
SCP POOL CORPORATION
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Other intangible amortization expense was $4.0 million in 2004 and $3.1 million in 2003. The table below presents estimated amortization expense for other intangible assets for the next five years (in thousands):
2005 | $ | 3,989 |
2006 |
| 3,314 |
2007 |
| 2,969 |
2008 |
| 1,909 |
2009 |
| 420 |
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2004 Acquisitions and Divestitures
In December 2004, we acquired certain assets of Latham International LP’s Canadian subsidiary, Pool Tech Distribution Inc., (Pool Tech or the Pool Tech Acquisition). Pool Tech distributes swimming pool supplies and equipment through three service centers in Ontario, Canada. We funded this transaction primarily through the exchange of manufacturing assets held by our subsidiary, Les Industries R.P. Inc. As a part of this transaction, we also completed the divestiture of our manufacturing assets located in Fort Wayne, Indiana to Latham Acquisition Corporation (LAC). In exchange for these assets and cash consideration, we received a 42% interest in LAC. We recorded approximately $4.7 million of goodwill in connection with this transaction, and we signed a non-compete agreement which we recorded as an intangible asset at the estimated fair value of $1.9 million. We are amortizing the non-compete agreement using the straight-line method over the five year contractual life. In connection with this transaction, LAC acquired the business of Latham International, LP, a manufacturer of vinyl swimming pool liners, polymer and steel panels, steps and related swimming pool products based in Albany, New York. We account for our interest in LAC using the equity method of accounting as prescribed by APB 18, The Equity Method of Accounting for Investments in Common Stock. We disposed of approximately $12.9 million of goodwill in connection with the divestiture of our manufacturing assets in Canada and Indiana. We recorded a $5.3 million gain on the exchange, the entire amount of which was deferred and recorded as a reduction of our investment in LAC.
Our decision to divest of our manufacturing facilities in Canada and Indiana will allow us to focus on our core distribution business while our investment in LAC will provide us with a strategic relationship with an important supplier.
2003 Acquisitions
In May 2003, we acquired the capital stock of Les Industries R.P. Inc. (the Quebec Acquisition), a distributor and manufacturer of swimming pool products operating one service center in Quebec, Canada. In connection with the Quebec Acquisition, we recorded the cost of a non-compete agreement totaling $0.7 million, which we are amortizing using the straight-line method over the agreement’s six-year contractual life. We also recorded approximately $1.3 million of goodwill in connection with the acquisition. As discussed above, in December 2004 we disposed of the manufacturing assets acquired in the Quebec Acquisition.
In August 2003, we acquired Sud Ouest Filtration (the SOFI Acquisition), a distributor and manufacturer of swimming pool products operating one service center in Bordeaux, France. The SOFI Acquisition represents our fourth location in France and expanded our market presence to the southwest part of that country. We also acquired in August certain assets of Mepasa Albercas, a swimming pool distributor in Cuernavaca, Mexico (the Mepasa Acquisition). The Cuernavaca service center is our first location in Latin America.
F-17
SCP POOL CORPORATION
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On October 1, 2003, we purchased substantially all of the assets of the distribution division of Litehouse Products, Inc. (the Litehouse Acquisition). This distribution division sells primarily in the Ohio, Pennsylvania and Michigan markets. This acquisition establishes a strong presence for us in northern Ohio and adjacent markets. We recorded approximately $2.5 million of goodwill in connection with this acquisition, all of which we expect will be deductible for tax purposes. The purchase agreement includes that a portion of the purchase price be paid in annual installments of $0.4 million for five years. We recorded these future payments as goodwill at the present value of $1.9 million, which we calculated using an interest rate of 2.6%. We signed two non-compete agreements totaling $3.0 million with certain shareholders of Litehouse Products, Inc. Additionally, we recorded a distribution agreement with the Litehouse retail stores as an intangible asset at the present value of the estimated fair value of $6.1 million, which we calculated using an interest rate of 2.6%. We are amortizing the non-compete and distribution agreements using the straight-line method over the five year contractual lives.
In November 2003, we purchased substantially all of the distribution assets of Hayward Iberica, S.A., an indirect wholly-owned subsidiary of Hayward Pool Products, Inc. (the Iberica Acquisition). Iberica distributed primarily Hayward equipment from two service centers in Madrid and Valencia, Spain. These two service centers are our first locations in Spain and allow us to further our presence in the European market.
We have included the results of operations of the Quebec, SOFI, Mepasa, Litehouse and Iberica Acquisitions in the Consolidated Financial Statements since the respective acquisition dates.
2002 Acquisitions
In August 2002, we purchased 100% of the outstanding common shares of Fort Wayne Pools, Inc. (the Fort Wayne Acquisition). Fort Wayne was a distributor and manufacturer of swimming pool equipment, parts and supplies, and its distribution network consisted of 22 service centers in 16 states.
The Fort Wayne Acquisition is consistent with our strategy of complementing our internal growth with the purchase of additional service centers. The acquisition of these additional 22 service centers expanded the reach and market share of our Superior network allowing us to enhance our service capabilities and better serve the growing pool industry. In the fourth quarter of 2002, we closed one location and consolidated 13 of the 22 acquired service centers with SPP locations. The remaining eight service centers operate as part of the Superior network.
The approximate $49.7 million cash purchase price was determined based on negotiations with the former shareholders of Fort Wayne and our valuation considerations, which included historical and prospective earnings, net asset value and other valuation considerations consistent with our historical valuations of acquisitions. In accordance with the purchase agreement, we placed $1.0 million of the purchase price in an escrow account to secure certain indemnification and other post-closing obligations of the sellers, and any amounts remaining in the escrow account in August 2005 will be paid to the sellers.
F-18
SCP POOL CORPORATION
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We allocated the purchase price, net of cash acquired, as follows (in thousands):
Receivables | $ | 16,500 |
Product inventories |
| 18,000 |
Property and equipment |
| 3,000 |
Goodwill |
| 33,900 |
Non-compete agreements |
| 4,400 |
Other assets |
| 800 |
Accounts payable and other liabilities |
| (26,900) |
| $ | 49,700 |
We do not expect the goodwill recorded in connection with the Fort Wayne Acquisition to be deductible for tax purposes. We signed non-compete agreements with certain former Fort Wayne shareholders providing for payments in the aggregate of $5.0 million over five years. We recorded the non-compete agreements at their present value of $4.4 million, which we calculated using an interest rate of 4.2%.
We have included the results of Fort Wayne’s operations in the Consolidated Financial Statements since the acquisition date. As discussed above, in December 2004 we divested of the manufacturing assets acquired in the Fort Wayne Acquisition.
F-19
SCP POOL CORPORATION
|
|
The table below presents additional information regarding certain balance sheet accounts (in thousands):
|
| December 31, | ||||
|
|
| 2004 |
| 2003 |
|
Receivables |
|
|
|
|
| |
| Trade accounts | $ | 10,545 | $ | 10,397 |
|
| Trade accounts, pledged |
| 63,702 |
| 58,096 |
|
| Vendor rebates |
| 21,662 |
| 17,251 |
|
| Other |
| 4,818 |
| 1,923 |
|
|
|
| 100,727 |
| 87,667 |
|
| Less allowance for doubtful accounts |
| (3,138) |
| (3,843) |
|
|
| $ | 97,589 | $ | 83,824 |
|
Property and equipment |
|
|
|
|
| |
| Land | $ | 1,026 | $ | 1,105 |
|
| Building |
| 1,342 |
| 1,141 |
|
| Leasehold improvements |
| 7,182 |
| 8,992 |
|
| Autos and trucks |
| 499 |
| 597 |
|
| Machinery and equipment |
| 12,270 |
| 18,038 |
|
| Computer equipment |
| 12,647 |
| 11,671 |
|
| Furniture and fixtures |
| 7,441 |
| 8,414 |
|
|
|
| 42,407 |
| 49,958 |
|
| Less accumulated depreciation |
| (23,812) |
| (25,315) |
|
|
| $ | 18,595 | $ | 24,643 |
|
Intangible assets |
|
|
|
|
| |
| Non-compete agreements | $ | 15,531 | $ | 17,623 |
|
| Distribution agreement |
| 6,115 |
| 6,115 |
|
|
|
| 21,646 |
| 23,738 |
|
| Less accumulated amortization |
| (9,026) |
| (9,107) |
|
|
| $ | 12,620 | $ | 14,631 |
|
Other assets |
|
|
|
|
| |
| Loan financing fees | $ | 2,010 | $ | 1,527 |
|
| Escrow for Fort Wayne Acquisition |
| 1,012 |
| 1,006 |
|
| Deposits and other |
| 1,357 |
| 1,115 |
|
|
|
| 4,379 |
| 3,648 |
|
| Less accumulated amortization |
| (1,563) |
| (1,186) |
|
|
| $ | 2,816 | $ | 2,462 |
|
Accrued expenses and other current liabilities |
|
|
|
|
| |
| Salaries, bonuses and profit sharing | $ | 17,532 | $ | 17,296 |
|
| Current deferred tax liability |
| 9,202 |
| 10,389 |
|
| Other |
| 11,553 |
| 7,701 |
|
|
| $ | 38,287 | $ | 35,386 |
|
Accumulated other comprehensive income |
|
|
|
|
| |
| Foreign currency items | $ | 2,874 | $ | 1,292 |
|
| Net loss on cash flow hedge derivative |
| — |
| (17) |
|
|
| $ | 2,874 | $ | 1,275 |
|
F-20
SCP POOL CORPORATION
|
|
The components of our long-term debt for the past two years were as follows (in thousands):
|
|
| December 31, | |||
|
|
| 2004 |
| 2003 |
|
Revolving Line of Credit, variable rate (effective interest |
|
|
|
|
| |
| rate of 3.2% at December 31, 2004), due in 2009 | $ | 50,420 | $ | 38,900 |
|
Purchase price payments to Litehouse |
| 1,482 |
| 1,852 |
| |
Payments due - non-compete agreements |
| 3,008 |
| 3,987 |
| |
Other |
| — |
| 3,607 |
| |
|
|
| 54,910 |
| 48,346 |
|
Less current portion |
| (1,350) |
| (40,250) |
| |
Total long-term debt | $ | 53,560 | $ | 8,096 |
| |
On November 2, 2004, we entered into an unsecured syndicated senior credit facility (the Credit Facility) with a group of banks. This Credit Facility replaced our previous senior secured credit facility dated November 27, 2001. The Credit Facility, which matures on November 2, 2009, provides for a $120.0 million five-year revolving credit facility, which includes sublimits for the issuance of swingline loans and standby letters of credit. The aggregate maximum principal amount of the commitments under the Credit Facility may be increased from time to time by a total amount up to $40.0 million.
We capitalized $0.5 million of financing costs we incurred in implementing the Credit Facility and we are amortizing these costs over the five year contractual life of the Credit Facility. All capitalized costs related to our previous senior secured credit facility were fully amortized prior to when we replaced the facility in November 2004.
At December 31, 2004, there was $50.4 million outstanding and $68.4 million available for borrowing under the Credit Facility. The average effective interest rate of the Credit Facility was approximately 3.2% for the year ended December 31, 2004.
Our obligations are guaranteed by all of our existing and future direct and indirect subsidiaries. Borrowings and standby letters of credit under the Credit Facility bear interest, at our option, at either (a) a base rate, which is the greater of (i) the Wachovia Bank, National Association prime rate or (ii) the overnight Federal Funds Rate plus 0.50%, or (b) the London Interbank Offered Rate (LIBOR) plus a spread ranging from 0.600% to 1.25%, with such spread in each case depending on our leverage ratio. We are also required to pay (a) an annual facility fee of 0.150% to 0.250%, with such spread in each case depending on our leverage ratio, (b) an annual commercial letter of credit issuance fee of 0.125% multiplied by the face amount of each letter of credit and (c) a letter of credit commission of 0.150% to 0.250% multiplied by face amount of each letter of credit, with such spread in each case depending on our leverage ratio.
The Credit Facility contains terms and provisions (including representations, covenants and conditions) customary for transactions of this type. Financial covenants include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio. Other covenants include restrictions on our ability to, among other things, pay dividends or make other capital distributions (other than in accordance with our current dividend policy).
The Credit Facility contains customary events of default. If an event of default occurs and is continuing under the Credit Facility, the lenders may terminate their obligations thereunder and may require us to repay all amounts thereunder. As of December 31, 2004, we were in compliance with all covenants and financial ratio requirements.
F-21
SCP POOL CORPORATION
|
|
At December 31, 2004, we had outstanding borrowings of $42.6 million under our accounts receivable securitization facility (the Receivables Facility). In the first quarter of 2004, we renewed the Receivables Facility, which has a seasonal borrowing capacity up to $100.0 million, through March 2005. 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 sheet. We employed this arrangement because it provides us with a lower cost form of financing. At December 31, 2004, the average effective interest rate of the Receivables Facility was approximately 2.0%.
The Receivables Facility has numerous restrictive covenants, which require that we maintain a minimum average total leverage ratio, fixed charge coverage ratio and minimum net worth ratio. As of December 31, 2004, we were in compliance with all covenants and financial ratio requirements.
Additionally, in 2003 we signed a $0.5 million non-compete agreement with a Litehouse shareholder, which provides for monthly payments over five years. We recorded the agreement at its $0.5 million present value. As discussed in Note 3 above, the Litehouse purchase agreement requires a portion of the purchase price to be paid in annual installments of $0.4 million for five years. We recorded these future payments as goodwill at the present value of $1.9 million. We calculated the present value of the non-compete agreement and goodwill payments using an interest rate of 2.6%.
In 2002, we signed non-compete agreements with certain former Fort Wayne shareholders providing for $1.0 million annual payments over five years. We recorded the non-compete agreements at their present value of $4.4 million, which we calculated using an interest rate of 4.2%.
In May 2003, we entered into an interest rate swap agreement as a cash flow hedge to reduce our exposure to fluctuations in interest rates. Any difference paid or received on the interest rate swap was recognized as an adjustment to interest expense over the life of the swap. The swap became effective September 30, 2003 and terminated on May 28, 2004.
|
|
Income from continuing operations before the provision for income taxes is attributable to the following jurisdictions (in thousands):
|
| Year Ended December 31, | |||||
|
| 2004 |
| 2003 |
| 2002 |
|
United States | $ | 104,224 | $ | 80,430 | $ | 66,705 |
|
Foreign |
| 5,515 |
| 2,927 |
| 1,005 |
|
Total | $ | 109,739 | $ | 83,357 | $ | 67,710 |
|
F-22
SCP POOL CORPORATION
|
|
The provision for income taxes consisted of the following (in thousands):
|
|
| Year Ended December 31, | |||||
|
|
| 2004 |
| 2003 |
| 2002 |
|
Current |
|
|
|
|
|
|
| |
| Federal | $ | 37,448 | $ | 28,140 | $ | 19,891 |
|
| Foreign |
| 1,358 |
| 945 |
| 275 |
|
| Other, primarily state |
| 3,528 |
| 3,081 |
| 3,333 |
|
|
|
| 42,334 |
| 32,166 |
| 23,499 |
|
Deferred |
|
|
|
|
|
|
| |
| Federal |
| 793 |
| 317 |
| 2,693 |
|
| Other, primarily state |
| (329) |
| 26 |
| 215 |
|
|
|
| 464 |
| 343 |
| 2,908 |
|
Total | $ | 42,798 | $ | 32,509 | $ | 26,407 |
| |
We made payments related to income taxes totaling $36.7 million in 2004 and $25.2 million in 2003.
A reconciliation of the U.S. federal statutory tax rate to our effective tax rate on income before income taxes is as follows:
|
|
| Year Ended December 31, | |||||
|
|
| 2004 |
| 2003 |
| 2002 |
|
Federal statutory rate |
| 35.00 | % | 35.00 | % | 35.00 | % | |
Other, primarily state income tax rate |
| 4.00 |
| 4.00 |
| 4.00 |
| |
Total effective tax rate |
| 39.00 | % | 39.00 | % | 39.00 | % | |
F-23
SCP POOL CORPORATION
|
|
The components of the deferred tax assets and liabilities are as follows (in thousands):
|
|
| December 31, | ||
|
|
| 2004 |
| 2003 |
Deferred tax liabilities |
|
|
|
| |
| Trade discounts on purchases | $ | 3,851 | $ | 6,670 |
| Prepaid expenses |
| 2,145 |
| 1,850 |
| Allowance for doubtful accounts |
| 165 |
| — |
| Accumulated other comprehensive income |
| 1,843 |
| 827 |
| Other |
| 1,198 |
| 1,042 |
Total current deferred tax liabilities |
| 9,202 |
| 10,389 | |
| Intangible assets, primarily goodwill |
| 10,706 |
| 10,081 |
| Depreciation |
| 919 |
| 488 |
Total non-current deferred tax liabilities |
| 11,625 |
| 10,569 | |
Total deferred tax liabilities |
| 20,827 |
| 20,958 | |
Deferred tax assets |
|
|
|
| |
| Product inventories |
| 2,075 |
| 1,398 |
| Allowance for doubtful accounts |
| — |
| 333 |
| Accrued expenses |
| 265 |
| 133 |
Total current deferred tax assets |
| 2,340 |
| 1,864 | |
| Leases |
| 642 |
| — |
Total non-current deferred tax assets |
| 642 |
| — | |
Total deferred tax assets |
| 2,982 |
| 1,864 | |
Deferred tax liabilities net of deferred tax assets | $ | 17,845 | $ | 19,094 | |
We reduce federal, state and foreign income taxes payable by the tax benefits associated with the exercise of stock options. We receive an income tax benefit based on the difference between the option exercise price and the fair market value of the stock at the time the option is exercised. This benefit, which we record in stockholders’ equity, was $3.9 million in 2004 and $2.1 million in 2003.
As of December 31, 2004, United States taxes were not provided on earnings of our foreign subsidiaries, as we have invested or expect to invest the undistributed earnings indefinitely. If in the future these earnings are repatriated to the United States, or if we determine that the earnings will be remitted in the foreseeable future, additional tax provisions may be required.
We hold, through our affiliates, cash balances in the countries in which we operate, including substantial amounts held outside the United States. Most of the amounts held outside the United States could be repatriated to the United States, but, under current law, may be subject to United States federal income taxes, less applicable foreign tax credits. Repatriation of some foreign balances is restricted by local laws including the imposition of withholding taxes in some jurisdictions. We have not provided for the United States federal tax liability on these amounts and for financial statement purposes, these foreign cash balances are considered indefinitely reinvested outside the United States.
F-24
SCP POOL CORPORATION
|
|
The American Jobs Creation Act of 2004, enacted on October 22, 2004 (the Jobs Act), provides for a temporary 85% dividends received deduction on certain foreign earnings repatriated during a one-year period. The deduction would result in an approximate 5.25% federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings must be reinvested in the United States pursuant to a domestic reinvestment plan established by a company’s chief executive officer and approved by its board of directors. Certain other criteria in the Jobs Act must be satisfied as well. The maximum amount of our foreign earnings, if any, that qualify for the temporary deduction has not been determined. The one-year period during which we may make the qualifying distributions is fiscal 2005.
We are in the process of evaluating whether we have foreign earnings that qualify for the dividend received deduction and whether we will repatriate all or a portion of any qualifying foreign earnings. We have not determined the range of reasonably possible amounts that we may repatriate or an estimate of the possible United States federal and state income tax expense related to repatriation. We do not anticipate that the United States federal and state income tax will be material. We expect to determine the amounts and sources of foreign earnings to be repatriated, if any, by the third quarter of fiscal 2005.
As presented in the Consolidated Statement of Cash Flows, the change in deferred income taxes includes, among other items, the change in deferred income taxes related to the deferred income tax provision, the change between the deferred income taxes estimated for 2003 and actual deferred income taxes for 2003 and the change in deferred income taxes related to the estimated tax impact of accumulated other comprehensive income.
|
|
The table below presents the reconciliation of basic and diluted weighted average number of shares outstanding and the related earnings per share calculation (in thousands):
|
|
|
| Year Ended December 31, | ||||
|
|
|
| 2004 |
| 2003 |
| 2002 |
Numerator |
|
|
|
|
|
|
| |
| Net income | $ | 66,941 | $ | 50,848 | $ | 41,303 | |
| Adjustment for interest expense, net of tax, on convertible notes |
| — |
| — |
| 6 | |
| Numerator for diluted earnings per share | $ | 66,941 | $ | 50,848 | $ | 41,309 | |
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
| ||
| Denominator for basic earnings per share – weighted average shares |
| 52,838 |
| 53,058 |
| 54,521 | |
| Effect of dilutive securities |
|
|
|
|
|
| |
|
| Stock options |
| 3,276 |
| 2,706 |
| 2,223 |
|
| Restricted stock awards |
| 8 |
| — |
| — |
|
| Employee stock purchase plan |
| 17 |
| 9 |
| 5 |
|
| Convertible notes |
| — |
| — |
| 683 |
| Denominator for diluted earnings per share |
| 56,139 |
| 55,773 |
| 57,432 | |
F-25
SCP POOL CORPORATION
|
|
We lease facilities for our corporate office, service centers, vehicles and equipment under non-cancelable operating leases that expire in various years through 2017. Most of our leases contain renewal options, some of which involve rate increases. For leases with step rent provisions whereby the rental payments increase incrementally over the life of the lease, we recognize the total minimum lease payments on a straight-line basis over the minimum lease term. The table below presents rent expense associated with operating leases for the past three years (in thousands):
| 2004 |
| 2003 |
| 2002 |
|
$ | 38,513 | $ | 34,071 | $ | 29,949 |
|
The table below sets forth the approximate future minimum lease payments as of December 31, 2004 related to non-cancelable operating leases with initial terms of one year or more (in thousands):
2005 | $ | 25,908 |
2006 |
| 22,815 |
2007 |
| 16,724 |
2008 |
| 12,147 |
2009 |
| 7,498 |
Thereafter |
| 13,707 |
From time to time, we are subject to various claims and litigation arising in the ordinary course of business, including product liability, personal injury, commercial, contract and employment matters. With respect to product related matters, we believe that if any such product related cases are determined in favor of a claimant, the manufacturers of such products would have primary responsibility for any damages because we are a distributor of finished goods manufactured by third parties, although no assurance can be given. While the outcome of any litigation is inherently unpredictable, we do not believe, based on currently available facts, that the ultimate disposition of any of these matters will have a material adverse impact on our financial condition, results of operations or cash flows.
|
|
In October 1999, we entered into a lease agreement with S&C Development, LLC for a service center in Mandeville, Louisiana. The sole member of S&C Development, LLC is A. David Cook, a POOL executive officer. The seven year lease term commenced on January 1, 2000, and we pay rent of $6,510 per month. In January 2002, we entered into a lease agreement with S&C Development, LLC for additional warehouse space adjacent to our Mandeville service center. The five year lease term commenced on February 4, 2002, and we pay rent of $4,123 per month. The total $10,633 monthly lease payment is for both facilities consisting of 21,100 square feet.
In January 2001, we entered into a lease agreement with S&C Development, LLC for a service center in Oklahoma City, Oklahoma. The ten year lease term commenced on November 10, 2001, and we pay rent of $12,371 per month for the 25,000 square foot facility.
In March 1997, we entered into a lease agreement with Kenneth St. Romain for a service center in Baton Rouge, Louisiana. Kenneth St. Romain is the son of Frank J. St. Romain, who was President and Chief Executive Officer of SCP until January 1999 and was a director of SCP until May 2003. In January 2002, we extended this lease for a second term of five years which commenced on March 1, 2002. We pay rent of $10,137 per month for the 23,500 square foot facility.
F-26
SCP POOL CORPORATION
|
|
In May 2001, we entered into a lease agreement with Kenneth St. Romain for a service center in Jackson, Mississippi. The seven year lease term commenced on November 16, 2001, and we pay rent of $8,566 per month for the 20,000 square foot facility.
We believe the leases discussed above reflect fair market rates and are as favorable to us as we could have obtained from unrelated third parties. The table below presents rent expense associated with these leases for the past three years (in thousands):
| 2004 |
| 2003 |
| 2002 |
$ | 501 | $ | 493 | $ | 493 |
|
|
We offer a 401(k) savings and retirement plan, which provides benefits for substantially all employees who meet minimum age and length of service requirements. Eligible employees are able to contribute up to 25% of their base compensation, subject to the federal dollar limit. For plan participants, we contribute 50% of employee contributions up to 6% of their base compensation. Additionally, we make discretionary contributions to this plan under a profit-sharing provision.
The employee and Company sponsored contributions are invested in certain equity and fixed income securities based on individual employee elections.
The table below sets forth our matching contributions and profit-sharing contributions for the past three years (in thousands):
|
| 2004 |
| 2003 |
| 2002 |
Matching contributions | $ | 1,843 | $ | 2,365 | $ | 1,600 |
Profit-sharing contributions |
| 1,280 |
| — |
| 831 |
F-27
SCP POOL CORPORATION
|
|
Stock options represent the right to purchase shares of our common stock in the future at a price that is fixed on the day the options are granted (the grant date).
The table below summarizes our stock option activity for the past three years (in thousands, except weighted average exercise price and fair value):
|
| 2004 | 2003 | 2002 | ||||||
|
|
|
| Weighted |
|
| Weighted |
|
| Weighted |
|
|
|
| Average |
|
| Average |
|
| Average |
|
|
|
| Exercise |
|
| Exercise |
|
| Exercise |
|
| Options |
| Price | Options |
| Price | Options |
| Price |
Outstanding - beginning of year | 7,270,027 | $ | 6.35 | 6,720,193 | $ | 5.36 | 6,150,312 | $ | 4.27 | |
Granted | 691,401 |
| 21.94 | 987,638 |
| 12.05 | 885,825 |
| 12.46 | |
Exercised | 421,290 |
| 3.53 | 374,191 |
| 2.98 | 233,994 |
| 2.63 | |
Forfeitures | 65,279 |
| 11.31 | 63,613 |
| 9.79 | 81,950 |
| 9.73 | |
Outstanding - end of year | 7,474,859 |
| 7.91 | 7,270,027 |
| 6.35 | 6,720,193 |
| 5.36 | |
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year | 3,593,055 |
| 4.06 | 3,114,395 |
| 3.66 | 2,846,307 |
| 3.09 | |
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of |
|
|
|
|
|
|
|
|
| |
| options granted during the year |
|
| 9.67 |
|
| 4.97 |
|
| 6.18 |
The table below summarizes information about stock options outstanding and exercisable at December 31, 2004 (shares in thousands):
|
| Outstanding Stock Options |
| Exercisable Stock Options | |||||
|
|
| Weighted Average | Weighted |
|
| Weighted | ||
|
|
| Remaining | Average |
|
| Average | ||
Range of exercise prices | Shares | Contractual Life | Exercise Price |
| Shares | Exercise Price | |||
$ 0.00 to $5.99 |
| 3,699 | 3.8 years | $ | 2.97 |
| 2,828 | $ | 2.48 |
$ 6.00 to $ 11.99 |
| 2,252 | 7.0 years | $ | 10.06 |
| 642 | $ | 9.25 |
$ 12.00 to $ 17.99 |
| 839 | 7.2 years | $ | 12.51 |
| 123 | $ | 13.31 |
$ 18.00 to $ 23.99 |
| 647 | 9.1 years | $ | 21.67 |
| — | $ | — |
$ 24.00 to $ 29.80 |
| 38 | 9.5 years | $ | 26.69 |
| — | $ | — |
$ 0.00 to $ 29.80 |
| 7,475 | 6.3 years | $ | 7.91 |
| 3,593 | $ | 4.06 |
Under the 1995 Stock Option Plan (the 1995 Plan) our Board of Directors (the Board) was authorized to grant stock options to employees, agents, consultants or independent contractors. These options generally were exercisable two years after the grant date, and they expire ten years from the grant date. In May 1998, the Board suspended the 1995 Plan. Options granted prior to the suspension were not affected by this action.
In May 1998, our stockholders approved the 1998 Stock Option Plan (the 1998 Plan), which authorized the Board to grant stock options, stock appreciation rights, restricted stock and performance awards to employees, agents, consultants or independent contractors. These options generally were exercisable
F-28
SCP POOL CORPORATION
|
|
three or more years after the grant date, and they expire ten years after the grant date. In May 2002, the Board suspended the 1998 Plan. Options granted prior to the suspension were not affected by this action.
In May 2002, our stockholders approved the 2002 Long-Term Incentive Plan (the 2002 Plan), which authorized the Board to grant stock options and restricted stock awards to employees, agents, consultants or independent contractors. In May 2004, our stockholders approved an amendment to increase the number of shares authorized for issuance under the 2002 Plan from 1,575,000 to 2,700,000 shares. In 2004, we granted 614,901 options and 54,900 restricted shares under the 2002 Plan. As of December 31, 2004, 1,179,765 shares were available for grant. Granted options have an exercise price equal to our stock’s market price on the grant date. These options generally may be exercised three or more years after the grant date, and they expire ten years after the grant date. The restricted stock awards vest in five years.
The SCP Pool Corporation Non-Employee Directors Equity Incentive Plan permits the Board to grant stock options to each non-employee director. No more than 1,350,000 shares may be issued under this plan. In 2004, we granted 76,500 options to the non-employee directors. As of December 31, 2004, 226,896 shares were available for grant. The exercise price of the granted options was equal to our stock’s market price on the grant date. The options generally may be exercised one year after the grant date, and they expire ten years after the grant date.
In March 1998, the Board adopted the SCP Pool Corporation Employee Stock Purchase Plan. Under this plan, employees who meet minimum age and length of service requirements may purchase stock at 85% of the lower of:
a.the closing price of our common stock at the end of a six month period ending either June 30 or December 31; or
|
|
No more than 956,250 shares of our common stock may be issued under this plan. In 2004, we issued 58,867 shares under this plan, and 626,048 shares remained available at December 31, 2004.
|
|
The table below summarizes the unaudited quarterly operating results of operations for the past two years (in thousands, except per share data):
|
|
| Quarter |
| ||||||||||||||||
|
|
| 2004 |
| 2003 | |||||||||||||||
|
|
| First |
| Second |
| Third |
| Fourth |
|
| First |
| Second |
| Third |
| Fourth |
| |
Net sales | $ | 234,648 | $ | 504,177 | $ | 362,091 | $ | 209,937 |
| $ | 196,388 | $ | 431,885 | $ | 337,611 | $ | 189,948 |
| ||
Gross profit |
| 65,032 |
| 145,215 |
| 104,183 |
| 56,404 |
|
| 52,523 |
| 120,862 |
| 92,157 |
| 49,596 |
| ||
Net income (loss) |
| 4,080 |
| 43,595 |
| 22,010 |
| (2,744) |
|
| 1,484 |
| 33,963 |
| 18,396 |
| (2,995) |
| ||
Net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| Basic | $ | 0.08 | $ | 0.82 | $ | 0.42 | $ | (0.05) |
| $ | 0.03 | $ | 0.64 | $ | 0.35 | $ | (0.06) |
| |
| Diluted | $ | 0.07 | $ | 0.77 | $ | 0.39 | $ | (0.05) |
| $ | 0.03 | $ | 0.61 | $ | 0.33 | $ | (0.06) |
| |
The sum of diluted earnings per share for each of the quarters may not equal the total diluted earnings per share for the annual period because there is a difference in the way that in-the-money stock options are considered from quarter to quarter under the requirements of SFAS 128, Earnings per Share.
F-29
SCP POOL CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 1, 2005.7, 2006.
| SCP POOL CORPORATION | ||
| By: | ||
| / | |
| Wilson B. Sexton, Chairman of the Board | ||
and Director | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 1, 2005.7, 2006.
Signature: | Title: | |
/ | ||
| Chairman of the Board and Director | |
| Wilson B. Sexton | ||
/ | President, Chief Executive Officer and Director | |
Manuel J. Perez de la Mesa |
| |
/ | ||
| Vice President and Chief Financial Officer | |
| Mark W. Joslin | ||
/ | ||
| Controller (Principal Accounting Officer) and Assistant Treasurer | |
| Donald L. Meyer |
| |
/ | Director | |
Andrew W. Code |
| |
/ | Director | |
James J. Gaffney |
| |
/ | Director | |
George T. Haymaker |
| |
/ | Director | |
Harlan F. Seymour |
| |
/ | Director | |
| Robert C. Sledd | ||
|
| |
Signature Page
/ | Director | |
John E. Stokely |
|
INDEX TO EXHIBITS
Signature Page
SCP POOL CORPORATION
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS |
|
|
|
|
|
| ||||
Description |
| Balance at Beginning of Period |
| Charged to Costs and Expenses |
| Charged to Other Accounts (1) |
| Deductions (2) |
| Balance at End of Period |
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, 2004: |
|
|
|
|
|
|
|
|
|
|
Reserves and allowances deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts | $ | 3,843 |
| 1,308 | $ |
| $ | 2,013 | $ | 3,138 |
Allowance for inventory obsolescence |
| 3,115 |
| 346 |
|
|
| 377 |
| 3,085 |
YEAR ENDED DECEMBER 31, 2003: |
|
|
|
|
|
|
|
|
|
|
Reserves and allowances deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts | $ | 3,299 | $ | 2,136 | $ | 350 | $ | 1,942 | $ | 3,843 |
Allowance for inventory obsolescence |
| 3,099 |
| (6) |
|
|
| (22) |
| 3,115 |
YEAR ENDED DECEMBER 31, 2002: |
|
|
|
|
|
|
|
|
|
|
Reserves and allowances deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts |
| 2,778 |
| 1,450 |
| 693 |
| 1,622 |
| 3,299 |
Allowance for inventory obsolescence |
| 3,920 |
| (191) |
| 100 |
| 730 |
| 3,099 |
| |||
| Exhibit Number |
| Document Description | |
|
|
SCP POOL CORPORATION
| |||
|
| ||
| Composite Certificate of Incorporation of the Company.(1) | ||
| |||
| 3.2 | Composite Bylaws of the Company.(2) | ||
| |||
| 4.1 | Form of certificate representing shares of common stock of the Company.(3) | ||
| |||
| 10.1 | SCP Pool Corporation 1995 Stock Option Plan.(3)(11) | ||
| |||
| 10.2 | Form of Individual Stock Option Agreement under 1995 Stock Option Plan.(3)(11) | ||
| |||
| 10.3 | Amended and Restated Non-Employee Directors Equity Incentive Plan(7), as amended by Amendment No. 1.(4)(11) | ||
| |||
| 10.4 | SCP Pool Corporation 1998 Stock Option Plan.(5)(11) | ||
| |||
| 10.5 | Form of Stock Option Agreement under 1998 Stock Option Plan.(6)(11) | ||
| |||
| 10.6 | Amended and Restated SCP Pool Corporation Employee Stock Purchase | ||
| |||
| 10.7 | Amended and Restated SCP Pool Corporation 2002 Long-Term Incentive Plan.(11) (12) | ||
| |||
| 10.8 | Form of Stock Option Agreement under 2002 Long-Term Incentive Plan.(11)(12) | ||
| |||
| 10.9 | Employment Agreement, dated January 25, 1999, among SCP Pool Corporation, South Central Pool | ||
| Supply, Inc. and Manuel J. Perez de la | |||
| |||
| 10.10 | Employment Agreement, dated January 17, 2003, between SCP Distributors, LLC and John M. | ||
| |||
| 10.11 | Employment Agreement, dated January 17, 2003, between SCP Distributors, LLC and A. David Cook. (11) | ||
| |||
| 10.12 | Employment Agreement, dated January 17, 2003, between SCP Distributors, LLC and Christopher W. Wilson. (11) | ||
| |||
| 10.13 | Employment Agreement, dated January 17, 2003, between SCP Distributors, LLC and Stephen C. | ||
| |||
| 10.14 |
| Compensation of Non-Employee | |
| |||
| 10.15 | Form of Indemnity Agreement for Directors and | ||
| |||
| 10.16 | Louisiana Tax Equalization | ||
| |||
| 10.17 | Tax Reimbursement Arrangement. (1) (11) | ||
| |||
| 10.18 | Receivables Sale Agreement dated as of March 27, 2003, among SCP Distributors LLC, SCP Services LP and | ||
Superior Pool Products LLC, as Originators, and Superior Commerce LLC, as | |||
| |||
| 10.19 | Receivables Purchase Agreement dated as of March 27, 2003, among Superior Commerce, LLC, as Seller, SCP | ||
Distributors LLC, as Servicer, Jupiter Securitization Corporation and Bank One, NA (Main Office Chicago) as | |||
Agent(2), as amended by amendment dated as of March 25, 2004. (10) | |||
| |||
| 10.20 | Intercreditor Agreement dated as of March 27, 2003, by and between Bank One, NA, as agent under the Credit | ||
Agreement, and Bank One, NA (Main Office Chicago), as agent under the Receivables Purchase | |||
| |||
| 10.21 | Credit Agreement dated as of November 2, 2004, among SCP Pool Corporation, as US Borrower, SCP Distributors Inc., | ||
as Canadian Borrower, the Lenders, Wachovia Bank, National Association, as Administrative Agent, Swingline Lender | |||
and Issuing Lender, Congress Financial Corporation (Canada) as Canadian Dollar Lender, JPMorgan Chase Bank, as | |||
syndication Agent, Hibernia National Bank as Documentation Agent and Wells Fargo Bank Association, as Documentation Agent.(12) | |||
| |||
10.22 | Subsidiary Guaranty Agreement dated as of November 2, 2004. (12) | ||
| |||
| 10.23 | Performance Undertaking dated as of March 27, 2003, by and between SCP Pool Corporation and Superior Commerce LLC.(2) | ||
| |||
10.24 | Asset Exchange Agreement, dated as of November 12, 2004 by and among SCP Pool Corporation, Les Industries R.P. Inc. | ||
and Latham Acquisition Corp. (12) | |||
| |||
| 10.25 | Asset Contribution Agreement, dated as of November 12, 2004 by and among SCP Pool Corporation, Fort Wayne Pools, Inc | ||
and Latham Acquisition Corp. (12) | |||
| |||
| 10.26 | Subscription and Stockholders’ Agreement, dated as of November 12, 2004, by and among Latham Acquisition Corp., | ||
Fort Wayne Pools, Inc., Brockway Moran & Partners Fund II, L.P. and Brockway Moran & Partners | |||
| |||
| 10.27 | Lease (Mandeville Service Center) entered into as of October 19, 1999, by and between S&C | ||
Development Company, LLC and South Central Pool Supply, Inc, as amended by Lease | |||
Agreement Amendment No. One, entered into as of May 26, 2000, by and between S&C | |||
Development Company, LLC and South Central Pool Supply, Inc, as amended by Lease | |||
Agreement (Warehouse) entered into as of January 16, 2002, by and between S&C Development Company, LLC | |||
and SCP Distributors, LLC, as amended by First Amendment entered into as of | ||
February 11, 2002 by and between S&C Development Company, LLC and SCP Distributors, LLC.(1) |
| ||
| 10.28 | Lease (Oklahoma Service Center) entered into as of January 15, 2001, by and between Dave Cook, | |
individually and SCP Pool Corporation, as amended by First Amendment, entered into as of | ||
October 24, 2001 by and between S&C Development, LLC and SCP Pool Corporation, | ||
as amended by First Amendment, entered into, as of December 5, 2001 by and between S&C | ||
Development, LLC and SCP Pool Corporation.(1) | ||
| ||
| 10.29 | Form of Stock Option Agreement under the Non-employee | |
| ||
| 10.30 | Nonqualified Deferred Compensation Plan Basic Plan Document, dated March 1, 2005.(13) | |
| 10.31 | Nonqualified Deferred Compensation Plan Adoption Agreement by an among SCP Distributors, L.L.C., Superior Pool Products, L.L.C. and Cypress, Inc., dated March 1, 2005(13) | |
| 10.32 | Trust Agreement by and among SCP Distributors, L.L.C., Superior Pool Products, L.L.C. and Cypress, Inc. and T. Rowe Price Trust Company, dated March 1, 2005.(13) | |
| 10.33 | Agreement and Plan of Merger by and among Automatic Rain Company, Horizon Distributors, Inc. and the Shareholder Parties, dated August 26, 2005.(14) | |
| 10.34 | Second Amendment of the Credit Agreement, dated December 20, 2005, among SCP Pool Corporation, as US Borrower, SCP Distributors Inc., as Canadian Borrower, the Lenders, Wachovia Bank, National Association, as Administrative Agent Swingline Lender and Issuing Lender, Congress Financial Corporation (Canada) as Canadian Dollar Lender, JPMorgan Chase Bank, as syndication Agent, Hibernia National Bank and Wells Fargo Bank Association as Co-Documentation Agents and Regions Bank. | |
| 14 | Code of Business Conduct and Ethics for Directors, Officers and | |
| ||
| 21.1 | Subsidiaries of the registrant. | |
| ||
| 23.1 | Consent of Ernst & Young LLP. | |
| ||
| 31.1 | 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. | ||
| ||
| 31.2 | 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. | ||
| ||
| 32.1 | 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. | ||
| (1) | ||
| Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2004. | |
(2) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2003. | |
(3) | Incorporated by reference to the Company’s Registration Statement No. 33-92738. | |
(4) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002. | |
(5) | Incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A, filed April 8, 1998. | |
(6) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 | |
(7) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2001. | |
(8) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003. | |
(9) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2004. | |
(10) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2004. | |
(11) | Management contract or compensatory plan or arrangement. | |
| (12) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. | |
| (13) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2005. | |
| (14) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2005. |
63