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 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.
As part of 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 shares 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.
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:
• | penetrate new markets; | |
• | identify appropriate acquisition candidates; | |
• | complete acquisitions on satisfactory terms and successfully integrate acquired businesses; | |
• | obtain financing; | |
• | generate sufficient cash flows to support expansion plans and general operating activities; | |
• | maintain favorable supplier arrangements and relationships; and | |
• | identify and divest assets which do not continue to create value consistent with our objectives. |
| | | | | | | |
If we do not manage these potential difficulties successfully, our operating results could be adversely affected.
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
Item 7a. | Quantitative and Qualitative Disclosures about Market Risk |
We are exposed to market risks, including interest rate risk and foreign currency risk. The adverse effects of potential changes in these market risks are discussed below. The following discussion does not consider the effects of the reduced level of overall economic activity that could exist following such changes. Further, in the event of changes of such magnitude, we would likely take actions to mitigate our exposure to such changes.
Interest Rate Risk
Our earnings are exposed to changes in short-term interest rates because of the variable interest rates on our debt. 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; and (ii) we borrowed the maximum amount available under the Credit Facility ($120 million) and the Receivables Facility ($100 million) for all of 2005, then our pretax income would change by approximately $2.2 million and earnings per share would change by $0.02 per diluted share based on the number of weighed average diluted shares outstanding at December 31, 2004. The fair value of our Credit Facility is not affected by changes in market interest rates.
Foreign Exchange Risk
We have wholly-owned subsidiaries in Canada, Mexico, the United Kingdom, France, Portugal and Spain. 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.
Functional Currencies |
Canada | Canadian Dollar |
Mexico | Peso |
United Kingdom | British Pound |
France | Euro |
Portugal | Euro |
Spain | Euro |
Item 8. | Financial Statements and Supplementary Data |
See the attached Consolidated Financial Statements and related Notes (pages F-1 through F-28).
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable.
34
SCP POOL CORPORATION
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, 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, 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. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management has concluded that, as of December 31, 2004, 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.
The registered public accounting firm that audited the financial statements included on pages F-3 – F-28 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, 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.
In our opinion, management’s assessment that SCP Pool Corporation maintained effective internal control over financial reporting as of December 31, 2004, 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, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of 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 of SCP Pool Corporation and our report dated February 25, 2005 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
February 25, 2005
36
SCP POOL CORPORATION
Item 9B. | Other Information |
Not applicable.
Part III.
Item 10. | Directors and Executive Officers of the Registrant |
Incorporated by reference to the Company’s 2005 Proxy Statement to be filed with the SEC.
Item 11. | Executive Compensation |
Incorporated by reference to the Company’s 2005 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 2005 Proxy Statement to be filed with the SEC.
Item 13. | Certain Relationships and Related Transactions |
Incorporated by reference to the Company’s 2005 Proxy Statement to be filed with the SEC.
Item 14. | Principal Accounting Fees and Services |
Incorporated by reference to the Company’s 2005 Proxy Statement to be filed with the SEC.
37
SCP POOL CORPORATION
Part IV.
Item 15. | Exhibits and Financial Statement Schedules |
a. | 1. | The Consolidated Financial Statements included in Item 8 and set forth on pages |
| | F-1 through F-28. |
| | |
| 2. | Financial Statement Schedules. Schedule II – Valuation and Qualifying Accounts |
| | All other schedules are omitted because they are not applicable or are not required, |
| | or because the required information is included in the Consolidated Financial |
| | Statements or Notes. |
| | |
| 3. | The exhibits listed in the Index to the Exhibits. |
| | |
| | |
38
SCP POOL CORPORATION
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm | F-2 |
| |
Consolidated Balance Sheets | F-3 |
| |
Consolidated Statements of Income | F-4 |
| |
Consolidated Statements of Stockholders’ Equity | F-5 |
| |
Consolidated Statements of Cash Flows | F-6 |
| |
Notes to Consolidated Financial Statements | F-8 |
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 | | | | | | | |
(In thousands) | | Year Ended December 31, |
| | | | | | 2004 | | 2003 | | 2002 | |
Operating activities | | | | | | | |
Net income | | | $ | 66,941 | $ | 50,848 | $ | 41,303 | |
Adjustments to reconcile net income to net cash | | | | | | | |
| 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, | | | | | | | |
| | | net of effects of acquisitions and divestitures | | | | | | | |
| | | | Receivables | | (12,879) | | (4,976) | | 6,086 | |
| | | | Product inventories | | (2,681) | | 2,030 | | 16,635 | |
| | | | Prepaid expenses and other assets | | (2,405) | | (1,307) | | 1,312 | |
| | | | Accounts payable | | (6,880) | | 16,322 | | (18,306) | |
| | | | Accrued expenses and other current liabilities | | 3,660 | | (2,068) | | (1,418) | |
Net cash provided by operating activities | | 55,952 | | 78,134 | | 58,162 | |
| | | | | | | | | | | |
Investing activities | | | | | | | |
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 | | | | | | |
| | 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
1. | Organization and Summary of Significant Accounting Policies |
Description of Business
As of December 31, 2004, SCP Pool Corporation and its wholly-owned subsidiaries (the Company, 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
1. | Organization and Summary of Significant Accounting Policies (continued) |
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:
Weather | | Possible Effects |
Hot and dry | • | Increased purchases of chemicals and supplies |
| | for existing swimming pools |
| • | Increased purchases of above-ground pools |
| | |
Unseasonably cool weather or | • | Fewer pool installations |
extraordinary amounts of rain | • | Decreased purchases of chemicals and supplies |
| • | Decreased purchases of impulse items such as |
| | above-ground pools and accessories |
| | |
Unseasonably early warming trends | • | A longer pool season, thus increasing our sales |
(primarily in the northern half of the US) | | |
| | |
Unseasonably late warming trends | • | A shorter pool season, thus decreasing our sales |
(primarily in the northern half of the US) | | |
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
1. | Organization and Summary of Significant Accounting Policies (continued) |
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; |
• | changes in customer preferences; | |
• | the experience of the service center manager; | |
• | the previous inventory management performance of the service center; |
• | geographical location; and | |
• | new product offerings. | |
| | | | | |
Our reserve for inventory obsolescence may periodically require adjustment as changes occur in the above-identified factors.
F-10
SCP POOL CORPORATION
1. | Organization and Summary of Significant Accounting Policies (continued) |
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 | | the life of the lease, including any expected renewals |
Autos and trucks | | 3 years |
Machinery and equipment | | 10 years |
Computer equipment | | 3 - 5 years |
Furniture and fixtures | | 10 years |
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
1. | Organization and Summary of Significant Accounting Policies (continued) |
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
1. | Organization and Summary of Significant Accounting Policies (continued) |
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, |
| | | 2004 | | 2003 | | 2002 | |
Reported net income | $ | 66,941 | $ | 50,848 | $ | 41,303 | |
| | | | | | | | |
Add: | Stock-based employee compensation | | | | | | | |
| expense included in reported net | | | | | | | |
| income, net of the tax effect | | 537 | | 523 | | 204 | |
| | | | | | | | |
Deduct: | Stock-based employee compensation | | | | | | | |
| expense determined under the fair | | | | | | | |
| value method for all awards, | | | | | | | |
| net of the tax effect | | (3,672) | | (2,888) | | (2,350) | |
Pro-forma net income | $ | 63,806 | $ | 48,483 | $ | 39,157 | |
| | | | | | | | |
Basic earnings per share | | | | | | | |
| As reported | $ | 1.27 | $ | 0.96 | $ | 0.76 | |
| Pro-forma | $ | 1.21 | $ | 0.91 | $ | 0.72 | |
Diluted earnings per share | | | | | | | |
| As reported | $ | 1.19 | $ | 0.91 | $ | 0.72 | |
| Pro-forma | $ | 1.14 | $ | 0.87 | $ | 0.68 | |
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 | |
Risk-free interest rate | 3.87 | % | 3.38 | % | 4.98 | % |
Expected dividend yield | — | | — | | — | |
Expected volatility | 0.35 | | 0.33 | | 0.35 | |
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
2. | changes in the subjective input assumptions can materially affect the fair value estimate. |
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
1. | Organization and Summary of Significant Accounting Policies (continued) |
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:
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.
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
1. | Organization and Summary of Significant Accounting Policies (continued) |
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.
2. | Goodwill and Other Intangible Assets |
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
2. | Goodwill and Other Intangible Assets (continued) |
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 |
3. | Acquisitions and Divestitures |
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
3. | Acquisitions and Divestitures (continued) |
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
3. | Acquisitions and Divestitures (continued) |
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
4. | Details of Certain Balance Sheet Accounts |
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
6. | Income Taxes (continued) |
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
6. | Income Taxes (continued) |
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
6. | Income Taxes (continued) |
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.
7. | Common Stock and 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, |
| | | | 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
8. | 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 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.
9. | Related Party Transactions |
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
9. | Related Party Transactions (continued) |
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 |
10. | 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 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
11. | 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):
| | 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
11. | Stock Option and Stock Purchase Plans (continued) |
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
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 2004, we issued 58,867 shares under this plan, and 626,048 shares remained available at December 31, 2004.
12. | 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 | |
| | | 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.
| SCP POOL CORPORATION |
| |
| |
| |
| |
By: | /S/ WILSON B. SEXTON |
| Wilson B. Sexton, Chairman of the Board |
| and Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 1, 2005.
Signature: | Title: |
/S/ WILSON B. SEXTON | |
Wilson B. Sexton | Chairman of the Board and Director |
| |
/S/ MANUEL J. PEREZ DE LA MESA | |
Manuel J. Perez de la Mesa | President, Chief Executive Officer and Director |
| |
/S/ MARK W. JOSLIN | |
Mark W. Joslin | Vice President and Chief Financial Officer |
| |
/S/ DONALD L. MEYER | |
Donald L. Meyer | Controller (Principal Accounting Officer) and |
| Assistant Treasurer |
| |
/S/ ANDREW W. CODE | |
Andrew W. Code | Director |
| |
/S/ JAMES J. GAFFNEY | |
James J. Gaffney | Director |
| |
/S/ GEORGE T. HAYMAKER | |
George T. Haymaker | Director |
| |
/S/ HARLAN F. SEYMOUR | |
Harlan F. Seymour | Director |
| |
/S/ ROBERT C. SLEDD | |
Robert C. Sledd | Director |
| |
Signature Page
/S/ JOHN E. STOKELY | |
John E. Stokely | Director |
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 |
(1) | Acquisition of business. | |
(2) | Deductions represent uncollectible accounts written-off net of recoveries and inventory adjustments. |
SCP POOL CORPORATION
Exhibit | | |
Number | | Document Description |
3.1 | | 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 Plan. (4)(11) |
10.7 | | Amended and Restated SCP Pool Corporation 2002 Long-Term Incentive Plan.(11) |
10.8 | | Form of Stock Option Agreement under 2002 Long-Term Incentive Plan.(11) |
10.9 | | Employment Agreement, dated January 25, 1999, among SCP Pool Corporation, South Central Pool |
| | Supply, Inc. and Manuel J. Perez de la Mesa (6) (11). |
10.10 | | Employment Agreement, dated January 17, 2003, between SCP Distributors, LLC and John M. Murphy (11). |
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. Nelson (11). |
10.14 | | 2004 Compensation of Non-Employee Directors (11) |
10.15 | | Form of Indemnity Agreement for Directors and Officers (9) (11). |
10.16 | | Louisiana Tax Equalization Agreement (9). |
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 Buyer (2) |
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 Agreement (2). |
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. |
10.22 | | Subsidiary Guaranty Agreement dated as of November 2, 2004. |
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. |
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. |
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 II Co-Invest Fund, L.P. |
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 Directors Equity Incentive Plan (11) |
14 | | Code of Business Conduct and Ethics for Directors, Officers and Employees (8) |
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. |
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(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. |
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