Pool (POOL) 10-Q 2000 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________.

COMMISSION FILE NO.:0-26640

SCP POOL CORPORATION
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(Exact name of registrant as specified in its charter)

DELAWARE
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(State or other jurisdiction of
incorporation or organization) 36-3943363
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(I.R.S. Employer
Identification No.)

109 Northpark Boulevard,
Covington, Louisiana
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(Address of principal executive
offices) 70433-5001
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(Zip Code)

504-892-5521
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(Registrant’s telephone number, including areacode)

————————————————————————————————————
(former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES    [X]    NO     [_]

At October 31, 2000, there were 16,986,184 outstanding shares of the Registrant’s common stock, $.001 par value per share.

SCP POOL CORPORATION

Form 10-Q
For the Quarter Ended September 30, 2000

INDEX —————————————————————————————————— ———
Part I.	Financial Information	Page
Item 1.	Financial Statements (2000 Unaudited)
	Consolidated Balance Sheets	1
	Consolidated Statements of Income	2
	Condensed Consolidated Statements of Cash Flows	3
	Notes to Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	10
Part II.	Other Information
Item 6.	Exhibits and Reports on Form 8-K	11
Signature Page		12
Index to Exhibits		13

SCP POOL CORPORATION

Part I.       Financial Information
Item 1.     Financial Statements

Consolidated Balance Sheets
(Dollars, in thousands except share data)	(Unaudited)		(Note)
	September 30,		December 31,
	2000		1999
Assets
Current assets
Cash and cash equivalents	4,265		3,958
Receivables, net	66,951		40,932
Product inventories, net	88,222		84,252
Prepaid expenses	1,126		757
Deferred income taxes	2,874		2,544
Total current assets	163,438		132,443
Property and equipment, net	8,847		6,831
Goodwill, net	61,345		49,692
Other assets, net	2,507		5,175
Total assets	236,137		194,141
Liabilities and stockholders' equity
Current liabilities
Accounts payable	40,553		51,132
Accrued and other current liabilities	19,514		12,537
Current portion of long-term debt	6,250		5,000
Total current liabilities	66,317		68,669
Deferred income taxes	4,116		5,094
Long-term debt, less current portion	40,091		22,766
Stockholders’ equity
Common stock, $.001 par value; 20,000,000 shares
authorized; 16,985,734 and 17,115,900 shares issued and
outstanding in 2000 and 1999, respectively	18		17
Additional paid-in capital	57,573		55,266
Retained earnings	79,880		49,091
Treasury stock	(10,608	)	(6,231	)
Unearned compensation	(964	)	(554	)
Accumulated other comprehensive income	(286	)	23
Total stockholders' equity	125,613		97,612
Total liabilities and stockholders' equity	236,137		194,141

Note:     The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date.

The accompanying Notes are an integral part of the Consolidated Financial Statements.

1.

SCP POOL CORPORATION

Consolidated Statements of Income
(Dollars, in thousands except per share data) (Unaudited)	Three Months Ended September 30,				Nine Months Ended September 30,
	2000		1999		2000		1999
Net sales	190,474		163,325		565,062		487,356
Cost of sales	144,883		124,734		427,864		371,364
Gross profit	45,591		38,591		137,198		115,992
Selling and administrative expenses	28,173		24,583		83,099		71,433
Goodwill amortization	457		416		1,331		1,068
Operating income	16,961		13,592		52,768		43,491
Other income (expense)
Interest expense	(987	)	(751	)	(2,839	)	(2,524	)
Amortization expense	(222	)	(232	)	(667	)	(1,305	)
Miscellaneous income (expense)	49		269		543		(494	)
	(1,160	)	(714	)	(2,963	)	(4,323	)
Income before income taxes and change
in accounting principle	15,801		12,878		49,805		39,168
Income taxes	6,051		4,827		19,018		14,563
Income before change in accounting principle	9,750		8,051		30,787		24,605
Change in accounting principle, net of tax	—		—		—		(544	)
Net income	9,750		8,051		30,787		24,061
Net income per share of common stock
Basic
Income before change in accounting principle	0.57		0.47		1.81		1.42
Change in accounting principle	—		—		—		(0.03	)
Net income	0.57		0.47		1.81		1.39
Diluted
Income before change in accounting principle	0.55		0.45		1.74		1.38
Change in accounting principle	—		—		—		(0.03	)
Net income	0.55		0.45		1.74		1.35
Average shares outstanding
Basic	16,973		17,282		16,991		17,323
Diluted	17,777		17,906		17,723		17,858

The accompanying Notes are an integral part of the Consolidated Financial Statements.

2.

SCP POOL CORPORATION

Condensed Consolidated Statements of Cash Flows
(Dollars, in thousands) (Unaudited)	Nine Months Ended September 30,
	2000		1999
Operating activities
Income before change in accounting principle	30,787		24,605
Adjustments to reconcile income before change in accounting
principle to net cash provided by operating activities	(17,447	)	(6,025	)
Net cash provided by operating activities	13,340		18,580
Investing activities
Acquisition of businesses, net of cash acquired	(25,287	)	(22,907	)
Purchase of property and equipment	(3,254	)	(2,407	)
Proceeds from the sale of property and equipment	17		711
Net cash used in investing activities	(28,524	)	(24,603	)
Financing activities
Net borrowings on revolving loan	21,075		9,075
Payments on long-term debt	(2,500	)	(3,750	)
Issuance of common stock	1,584		2,624
Purchase of treasury stock	(4,377	)	(6,231	)
Net cash provided by financing activities	15,782		1,718
Effect of exchange rate changes on cash	(291	)	9
Change in cash and cash equivalents	307		(4,296	)
Cash and cash equivalents at beginning of period	3,958		4,911
Cash and cash equivalents at end of period	4,265		615

The accompanying Notes are an integral part of the Consolidated Financial Statements.

3.

SCP POOL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

1.     Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared by SCP Pool Corporation (the “Company”) in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of management, the accompanying unaudited interim financial statements reflect all adjustments consisting of normal recurring adjustments considered necessary for a fair presentation of the results of the interim period.

Operating results for the three month or nine month periods ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2000. The financial information set forth herein should be read in conjunction with the Company’s Notes to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed by the Company with the Securities and Exchange Commission.

2.     Earnings Per Share
Basic income per common share equals net income divided by the weighted average number of common shares outstanding during the period. Diluted income per common share equals net income plus the after tax interest incurred on the Company’s convertible notes, divided by common shares outstanding after giving effect to shares assumed to be issued on conversion of those notes and dilutive options.

3.     Stock Split
In May 2000, the Board of Directors declared a three-for-two stock split of the Company's common stock, which was paid in the form of a stock dividend on June 19, 2000 to the stockholders of record at the close of business on May 19, 2000. Accordingly, all prior period share and per share data and related capital amounts have been adjusted to reflect the effects of this split.

4.     Change in Effective Income Tax Rate
During the second quarter of 2000, the Company increased its effective income tax rate from 37.0% to 38.25% as a result of changes in its state income tax mix.

5.     Recent Developments
On July 31, 2000 and October 26, 2000, the Company completed the purchase of substantially all of the assets and the assumption of certain liabilities ofSuperior Pool Products, Inc. (“Superior”) and Pool Rite, Inc., (distributors of swimming pool equipment, parts and supplies) respectively. TheSuperior distribution network encompasses nineteen service centers in California, Arizona and Nevada. Pool Rite, Inc., operated two service centers in Miami, Florida. Both acquisitions were accounted for using the purchase method of accounting.

4.

SCP POOL CORPORATION

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of
                 Operations

The following discussion should be read in conjunction with Management’s Discussion and Analysis included in the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed by the Company with the Securities and Exchange Commission.

Results of Operations
The Company currently conducts operations through 130 service centers in 34 states, the United Kingdom and France.

The following table shows, for the periods indicated, information derived from the Company’s Consolidated Statements of Income expressed as a percentage of net sales for such period.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2000		1999		2000		1999
Net sales	100	.0%	100	.0%	100	.0%	100	.0%
Cost of sales	76	.1	76	.4	75	.7	76	.2
Gross profit	23	.9	23	.6	24	.3	23	.8
Selling and administrative expenses	14	.8	15	.1	14	.7	14	.7
Goodwill amortization	0	.2	0	.2	0	.2	0	.2
Operating income	8	.9	8	.3	9	.4	8	.9
Other income (expense)
Interest expense	(0	.5)	(0	.4)	(0	.5)	(0	.5)
Amortization expense	(0	.1)	(0	.1)	(0	.1)	(0	.3)
Miscellaneous income (expense)		—	0	.1		—	(0	.1)
Income before income taxes and change
in accounting principle	8	.3	7	.9	8	.8	8	.0
Income taxes	3	.2	3	.0	3	.4	3	.0
Income before change in accounting principle	5	.1	4	.9	5	.4	5	.0
Change in accounting principle, net of tax		—		—		—	(0	.1)
Net income	5	.1	4	.9	5	.4	4	.9

5.

SCP POOL CORPORATION

Results of Operations (continued)

The following discussions compare the Company’s results of operations for the three month and nine month periods ended September 30, 2000 and 1999.

Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
Net sales increased $27.2 million, or 17%, to $190.5 million in the three months ended September 30, 2000 from $163.3 million in the comparable 1999 period. An increase of 6.5% in same store sales at service centers open at least 15 months contributed $9.7 million to the increase, while service centers acquired fromSuperior in the third quarter of 2000 accounted for $15.2 million of the increase. Service centers acquired in the fourth quarter of 1999 and the sales at new service centers open less than 15 months contributed the balance of the increase.

Gross profit increased $7.0 million, or 18%, to $45.6 million in the three months ended September 30, 2000 from $38.6 million in the comparable 1999 period. The same store gross margin increased 60 basis points for the quarter ended September 30, 2000 compared to the third quarter of 1999. Gross profit as a percentage of net sales increased 30 basis points to 23.9% for the three months ended September 30, 2000 from 23.6% in the comparable 1999 period. The increase in margin was realized in all domestic regions during the third quarter of 2000 and is attributable to a continued focus on margin management at the service center level.

Operating expenses consisting of selling and administrative expenses and goodwill amortization increased $3.6 million, or 14%, to $28.6 million in the three months ended September 30, 2000 from $25.0 million in the comparable 1999 period. The increase reflects not only salaries, occupancy expense and other costs associated with new service centers, but also payroll and other operating costs required to support the increased sales volume at existing service centers. Operating expenses as a percentage of net sales decreased 30 basis points to 15.0% from 15.3% in the third quarter of 1999.

Interest and other expenses increased $0.5 million to $1.2 million in the three months ended September 30, 2000 from $0.7 million in the comparable 1999 period. The increase is primarily due to a slight decrease in miscellaneous income as well as a $0.2 million increase in interest expense. The increase in interest expense is a result of higher average debt levels between periods due to the acquisition ofSuperior in the third quarter of 2000.

6.

SCP POOL CORPORATION

Results of Operations (continued)

Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
Net sales increased $77.7 million, or 16%, to $565.1 million in the nine months ended September 30, 2000 from $487.4 million in the comparable 1999 period. An increase of 11.5% in same store sales at service centers open at least 15 months contributed $49.0 million to the increase, while service centers acquired fromSuperior in the third quarter of 2000 accounted for $15.2 million of the increase. Service centers acquired in the fourth quarter of 1999 and sales at new service centers open less than 15 months contributed the balance of the increase.

Gross profit increased $21.2 million, or 18%, to $137.2 million in the nine months ended September 30, 2000 from $116.0 million in the comparable 1999 period. Gross profit as a percentage of net sales increased to 24.3% for the nine months ended September 30, 2000 from 23.8% in the comparable 1999 period. The increase in margin was realized in all domestic regions and is attributable to a continued focus on margin management at the service center level.

Operating expenses consisting of selling and administrative expenses and goodwill amortization increased $11.9 million, or 16%, to $84.4 million in the nine months ended September 30, 2000 from $72.5 million in the comparable 1999 period. The increase reflects not only salaries, occupancy expense and other costs associated with new service centers, but also payroll and other operating costs required to support the increased sales volume at existing service centers. Operating expenses as a percentage of net sales remained unchanged.

Interest and other expenses decreased $1.3 million, or 30%, to $3.0 million in the nine months ended September 30, 2000 from $4.3 million in the comparable 1999 period. In the second quarter of 1999, the Company wrote off $1.2 million related to computer equipment replaced in connection with improvements to the Company’s information system and Year 2000 compliance efforts. There were no such write-offs in the nine month period ended September 30, 2000.

7.

SCP POOL CORPORATION

Seasonality and Quarterly Fluctuations

The Company’s business is highly seasonal. Weather is the principal external factor affecting the Company’s business. Hot weather can increase the purchase of chemicals and supplies and pool installations. Unseasonably cool weather or extraordinary amounts of rainfall during the peak selling season can decrease the purchase of chemicals and supplies and pool installations. In addition, unseasonably early or late warming trends can increase or decrease the length of the pool season and, consequently, the Company’s sales. 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 the Company may incur net losses.

The Company experiences a build-up of inventory and accounts payable during the first and second quarters of the year in anticipation of the peak swimming pool supply selling season. The Company’s peak borrowing occurs during the second quarter, primarily because dated accounts payable offered by the Company’s suppliers typically are payable in April, May and June, while the Company’s peak accounts receivable collections typically occur in June, July and August.

To encourage preseason orders, the Company, like many other swimming pool supply distributors, utilizes preseason sales programs that provide extended dating terms and other incentives to its customers. Some of the Company’s suppliers also offer extended dating terms on certain products to the Company for preseason or early season purchases. In offering extended dating terms to its customers and accepting extended dating terms from its suppliers, the Company effectively finances a portion of its receivables and inventory with extended payables.

The Company expects that its quarterly results of operations will continue to fluctuate depending on the timing and amount of revenue contributed by new service centers and acquisitions, if any. The Company attempts to open new service centers during the fourth quarter or the first quarter of the subsequent year to take advantage of preseason sales programs and the following peak season.

8.

SCP POOL CORPORATION

Seasonality and Quarterly Fluctuations (continued)

The following table sets forth certain unaudited quarterly data for the first, second and third quarters of 2000 and the four quarters of 1999, which, in the opinion of management, reflects all adjustments consisting of normal recurring adjustments considered necessary for a fair presentation of such data. Results of any one or more quarters are not necessarily indicative of results for an entire fiscal year or of continuing trends.

(Dollars, in thousands)	QUARTER
(Unaudited)	2000			1999
	First	Second	Third	First		Second		Third		Fourth
Net sales	120,631	253,957	190,474	98,906		225,125		163,325		82,469
Gross profit	28,522	63,085	45,591	22,755		54,646		38,591		17,303
Operating income (loss)	2,679	33,128	16,961	1,973		27,926		13,592		(4,148	)
Net sales as a % of
annual net sales	N/A	N/A	N/A	17	%	39	%	29	%	15	%
Gross profit as a % of
annual gross profit	N/A	N/A	N/A	17	%	41	%	29	%	13	%
Operating income (loss)
as a % of annual
operating income	N/A	N/A	N/A	5	%	71	%	35	%	(11	)%

Liquidity and Capital Resources
Currently, the Company’s primary sources of working capital are cash flows from operations and borrowings under its Senior Loan Facility consisting of a term loan and a revolving line of credit. The revolving line of credit has a total borrowing capacity of $65.0 million. The Company’s borrowings under its credit facilities, together with cash flows from operations and seller financing have historically been sufficient to support the Company’s growth and to finance acquisitions. Considering the Company’s borrowing base as of September 30, 2000, the Company had $28.3 million available for borrowing under its Senior Loan Facility, the only additional credit source currently available to the Company.

Net cash provided by operating activities was $13.3 million for the nine month period ended September 30, 2000 compared to $18.6 million in the same period last year.

During the nine months ended September 30, 2000, the Company had net borrowings on its revolver loan of $21.1 million to fund the acquisition of businesses and to meet net seasonal working capital requirements. On July 31, 2000, the Company acquired substantially all of the assets and assumed certain liabilities ofSuperior Pool Products, Inc., a distributor of swimming pool equipment, parts and supplies encompassing nineteen service centers in California, Arizona and Nevada. The Company also made scheduled principal payments of $2.5 million required under its Senior Loan Facility.

9.

SCP POOL CORPORATION

Liquidity and Capital Resources (continued)

Borrowings under the Senior Loan Facility may, at the Company’s option, bear interest at either (i) the agent bank’s corporate base rate or the federal funds rate plus 0.5%, whichever is higher, plus a margin ranging from 0.0% to 0.5% or (ii) LIBOR plus a margin ranging from 0.75% to 2.0%, in each case depending on the Company’s leverage ratio. Substantially all of the assets of the Company, including the capital stock of its wholly owned subsidiaries, secure the obligations under the Senior Loan Facility. The Senior Loan Facility has numerous restrictive covenants which require the Company to maintain minimum levels of interest coverage and fixed charge coverage and which also restrict the Company’s ability to pay dividends and make capital expenditures.

In February 2000, the Company purchased 232,500 shares of its common stock pursuant to a share repurchase program announced in October 1998. In April 2000, the Company purchased 31,500 shares of its common stock pursuant to a share repurchase program announced in November 1999. Certain intercompany dividends paid by the Company and related to such stock repurchases created covenant defaults under the Senior Loan Facility. On April 17, 2000, the lenders under the Senior Loan Facility waived such defaults in accordance with the provisions of the Senior Loan Facility.

The above-mentioned shares purchased pursuant to the Company’s share repurchase program have been adjusted to reflect the three-for-two stock split of the Company’s common stock effective June 19, 2000.

The Company’s acquisitions have been financed primarily by borrowings under its credit facilities and seller financing. In order to finance future acquisitions, the Company may utilize its ability to borrow additional funds under the Senior Loan Facility or, depending on market conditions, incur additional indebtedness or issue common or preferred stock (which may be issued to third parties or to sellers of acquired businesses).

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk
As a result of the variable interest rates on the Senior Revolving Note and Senior Term Note under the Senior Loan Facility, the Company’s earnings are exposed to changes in short-term interest rates. If (i) the variable rates on the Company’s Senior Loan Facility were to increase by 1.0% from the rate at December 31, 1999; (ii) the Company borrowed the maximum amount available under its revolving line of credit ($65.0 million) for all of 2000; and (iii) the Company made all required payments of principal ($5.0 million) in 2000, then solely as a result of the increase in interest rates, the Company’s interest expense would increase $739,000 resulting in a $456,000 decrease in net income, assuming an effective tax rate of 38.25%. The fair value of the Company’s Senior Revolving Note and Senior Term Note is not affected by changes in market interest rates.

Foreign Exchange Risk
There have been no material changes from that reported in the Company’s Form 10-K for the year ended December 31, 1999.

10.

SCP POOL CORPORATION

Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995

The above statements regarding future periods which are not historical facts are forward-looking statements that involve risks and uncertainties, including but not limited to factors related to (i) the sensitivity of the swimming pool supply business to weather conditions; (ii) the intense competition and low barriers to entry in the swimming pool supply industry; (iii) the sensitivity of the swimming pool supply business to general economic conditions; (iv) the Company’s ability to identify appropriate acquisition candidates, complete acquisitions on satisfactory terms or successfully integrate acquired businesses; (v) the Company’s ability to obtain financing on satisfactory terms; (vi) the risk of fire, safety and casualty losses and related claims of liability inherent in the storage of chemicals sold by the Company; (vii) the Company’s ability to remain in compliance with the numerous environmental, health and safety requirements to which it is subject; and (viii) the other factors discussed in the Company’s filings with the Securities and Exchange Commission. Such factors could affect the Company’s actual results and could cause such results to differ materially from the Company’s expectations described above.

The Company’s stockholders should also be aware that while the Company does, at various times, communicate with securities analysts, it is against the Company’s policies to disclose to such analysts any material non-public information or other confidential information. Accordingly, the Company’s stockholders should not assume that the Company agrees with statements or reports issued by such analysts. To the extent such statements or reports contain projections, forecasts or opinions by such analysts about the Company, such reports are not the responsibility of the Company.

For additional information identifying other important factors which may affect the Company’s operations and markets and could cause actual results to vary materially from those anticipated in the forward-looking statements, see the Company’s Securities and Exchange Commission filings, including but not limited to the discussion included in the Business section of the Company’s Form 10-K.

Part II.     Other Information
Item 6.     Exhibits and Reports on Form 8-K

(a.)   Exhibits required by Item 601 of Regulation S-K

                           27.1      Financial Data Schedule

(b.)   On August 14, 2000, the Company filed a Form 8-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, Item 2, Acquisition or Disposition of Assets reporting the acquisition of the business ofSuperior Pool Products, Inc., previously operated as a subsidiary of Arch Chemicals, Inc. The acquisition was completed at the close of business on July 31, 2000.

Items 1 - 5 are not applicable and have been omitted.

11.

SCP POOL CORPORATION

Signature Page

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on
November 9, 2000.

                SCP POOL CORPORATION

BY:     /s/ Craig K. Hubbard

Craig K. Hubbard, Chief Financial Officer,

Treasurer and Secretary and duly

authorized signatory on behalf of the

Registrant

12.

SCP POOL CORPORATION

Index to Exhibits

27.1     Financial Data Schedule

13.