Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
|
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31, 2009
or
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to
Commission
File Number: 0-26640

POOL
CORPORATION
(Exact
name of Registrant as specified in its charter)
Delaware
|
36-3943363
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
109
Northpark Boulevard, Covington, Louisiana
|
70433-5001
|
(Address
of principal executive offices)
|
(Zip
Code)
|
985-892-5521
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
Name
of each exchange on which registered
|
Common
Stock, par value $0.001 per share
|
NASDAQ
Global Select Market
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES x NO ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. YES ¨ NO x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES x NO ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulations S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). YES ¨ NO ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer x Accelerated
filer ¨
Non-accelerated
filer ¨
(Do not check if a smaller reporting
company) Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). YES ¨ NOx
The
aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant based on the closing sales price of the
Registrant’s common stock as of June 30, 2009 was
$776,671,055.
As of
February 22, 2010, the Registrant had 49,164,271 shares of common
stock outstanding.
Documents
Incorporated by Reference
Portions
of the Registrant’s Proxy Statement to be mailed to stockholders on or about
March 26, 2010 for the
Annual
Meeting to be held on May 4, 2010, are incorporated by reference in
Part III of this Form 10-K.
POOL
CORPORATION
TABLE
OF CONTENTS
Page
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PART
I.
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Item
1.
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1
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Item
1A.
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8
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Item
1B.
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11
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Item
2.
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12
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Item
3.
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14
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PART
II.
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Item
5.
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14
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Item
6.
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16
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Item
7.
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17
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Item
7A.
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37
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Item
8.
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38
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Item
9.
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67
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Item
9A.
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67
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Item
9B.
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70
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PART III.
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Item
10.
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70
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Item
11.
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70
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Item
12.
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70
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Item
13.
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70
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Item
14.
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70
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PART
IV.
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Item
15.
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71
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72
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Item
1. Business
General
Based on
industry data, Pool Corporation (the Company, which may be
referred to as POOL, we, us
or our) is the
world’s largest wholesale distributor of swimming pool supplies, equipment and
related leisure products and one of the top three distributors of landscape and
irrigation products in the United States. The Company was
incorporated in the State of Delaware in 1993 and has grown from a regional
distributor to a multi-national, multi-network distribution
company.
Our
industry is highly fragmented, and as such, we add considerable value to the
industry by purchasing products from a large number of manufacturers and then
distributing the products and offering a range of services to our customer base
on conditions that are more favorable than these customers could obtain on their
own.
As of
December 31, 2009 we operated 287 sales centers in North America and Europe
through our three distribution networks: SCP Distributors LLC (SCP), Superior
Pool Products LLC (Superior) and Horizon Distributors, Inc.
(Horizon). Superior and Horizon are both wholly owned subsidiaries of
SCP, which is wholly owned by Pool Corporation.
Our
Industry
We
believe that the swimming pool industry is relatively young, with room for
continued growth from increased penetration of new pools. Of the
approximately 70 million homes in the United States that have the economic
capacity and the yard space to have a swimming pool, approximately 13% own a
pool. Higher rates of new home construction from 1996 to 2005 have
added to the market expansion opportunity for pool ownership, particularly in
larger pool markets.
We
believe favorable demographic and socioeconomic trends have and will continue to
positively impact the long-term prospects of our industry. These
favorable trends include the following:
·
|
long-term
growth in housing units in warmer markets due to the population migration
towards the south, which contributes to the growing installed base of
pools that homeowners must
maintain;
|
·
|
increased
homeowner spending on outdoor living spaces for relaxation and
entertainment; and
|
·
|
consumers
bundling the purchase of a swimming pool and other products, with new
irrigation systems and landscaping often being key components to both pool
installations and remodels.
|
The
irrigation and landscape industry has many characteristics in common with the
pool industry, and we believe that it benefits from the same favorable
demographic and socioeconomic trends and will realize long-term growth rates
similar to the pool industry.
Approximately
70% of consumer spending in the pool industry is derived from the maintenance of
existing swimming pools. Maintaining proper chemical balance and the
related upkeep and repair of swimming pool equipment, such as pumps, heaters,
filters and safety equipment creates a non-discretionary demand for pool
chemicals, equipment and other related parts and supplies. We also
believe cosmetic considerations such as a pool’s appearance and the overall look
of backyard environments create an ongoing demand for other maintenance related
goods and certain discretionary products.
We believe
that the recurring nature of the maintenance and repair market has helped
maintain a relatively consistent rate of industry growth historically, and has
helped cushion the negative impact on revenues in periods when unfavorable
economic conditions and softness in the housing market adversely impact pool
construction activities such as 2006 through 2009.
1
The table
below reflects growth in the domestic installed base of in-ground and
above-ground swimming pools over the past 11 years (based on Company estimates
and information from 2007 P.K. Data, Inc. reports):

The
replacement and refurbish market includes major swimming pool repairs and
currently accounts for approximately 20% of consumer spending in the pool
industry. This activity is more sensitive to economic factors that
impact consumer spending compared to the maintenance and minor repair
market. New swimming pool construction comprises the bulk of the
remaining consumer spending in the pool industry. The demand for new pools
is driven by the perceived benefits of pool ownership including relaxation,
entertainment, family activity, exercise and convenience. The
industry competes for new pool sales against other discretionary consumer
purchases such as kitchen and bathroom remodeling, boats, motorcycles,
recreational vehicles and vacations.
The
landscape and irrigation distribution business is split between residential and
commercial markets, with the majority of sales related to the residential
market. Landscape and irrigation maintenance activities account for
40% of total spending in the irrigation industry, with the remaining 60% of
spending related to irrigation construction and other discretionary related
products. As such, our irrigation business is more heavily weighted
towards the sale of discretionary related products compared to our pool
business.
General economic
conditions (as commonly measured by Gross Domestic Product or GDP), the
availability of consumer credit and certain trends in the
housing market affect our industry, particularly new pool and irrigation system
starts. Positive GDP trends may have a favorable impact on
industry starts, while negative trends may be unfavorable for industry
starts. We believe there is a direct correlation between industry
starts and the rate of housing turnover and home appreciation over time, with
higher rates of home turnover and appreciation having a positive impact on
starts over time. We also believe that homeowners’ access to consumer
credit, particularly as facilitated by mortgage-backed financing markets, is a
critical enabling factor in the purchase of new swimming pools and irrigation
systems.
The
continuing adverse economic trends that began in 2006 and worsened through 2009
have negatively impacted our industry and our performance. Specific
issues included a slowdown in the domestic housing market, with lower housing
turnover, a sharp drop in new home construction, home value deflation in many
markets and a significant tightening of consumer and commercial
credit. The downturn in the real estate and credit markets that began
in 2006 was compounded by the overall deterioration in general economic
conditions in late 2008 and throughout 2009. These trends resulted in
significant decreases in new construction activities, and we estimate that pool
construction has declined approximately 80% since 2005. Pool
refurbishment and replacement activities were also significantly impacted as
consumers began to defer discretionary purchases as the economy
worsened. The impact of these trends was more severe in 2007 and 2008
in some of the largest pool markets including California, Florida and Arizona,
with a more recent adverse impact in Texas and other states.
Since
irrigation is more heavily weighted towards new construction activities, this
has resulted in a greater impact on our Horizon business as new home and
commercial construction rates have fallen. We have consolidated
several facilities and significantly reduced operating costs related to our
Horizon network, and we expect these measures will mitigate the greater rate of
earnings decline for our irrigation business.
2
We are
encouraged by indications that the downward economic trends of the past several
years are moderating, which is evidenced by the fact that the level of sales
declines in the major pool markets first impacted by the negative external
trends diminished as 2009 progressed. The landscape and irrigation
markets that we participate in have not yet shown improvement as these markets
tend to lag the trends in the corresponding pool markets by up to a
year.
We
believe there is potential for significant sales recovery over the next several
years, driven by both the aging of the installed base of in-ground pools and
pent-up demand for replacement and retrofit activity that consumers have
deferred due to recent market conditions. We also anticipate that new
pool and irrigation construction activities will gradually begin to return to
more normalized levels, but we expect the replacement
and refurbish market will rebound before the new construction market and believe
it may be 2011 before there is growth in new construction
activities. We expect that sales levels should once again benefit
from long-term industry growth dynamics and that over the long-term the industry
will return to an annual growth rate of approximately 2% to 6% when the overall
economy does rebound and the real estate and credit markets revert to
normal.
Our
industry is seasonal and weather is one of the principal external factors that
affect our business. Peak industry activity occurs during the warmest
months of the year, typically April through September. Unseasonable
warming or cooling trends can delay or accelerate the start or end of the pool
and landscape season, impacting our maintenance and repair
sales. These impacts at the shoulders of the season are generally
more pronounced in northern markets. Weather also impacts our sales
of construction and installation products to the extent that above average
precipitation, late spring thaws in northern markets and other extreme weather
conditions delay, interrupt or cancel current or planned construction and
installation activities.
The
industry is also affected by other factors including, but not limited to,
consumer attitudes toward pool and landscape products for environmental or
safety reasons.
Business
Strategy and Growth
Our
mission is to provide exceptional value to our customers and suppliers, in order
to provide exceptional return to our shareholders while providing exceptional
opportunities to our employees. Our three core strategies are to
promote the growth of our industry, to promote the growth of our customers’
businesses and to continuously strive to operate more effectively.
We
promote the growth of the industry through various advertising and promotional
programs intended to raise consumer awareness of the benefits and affordability
of pool ownership, the ease of pool maintenance and the many ways in which a
pool and the surrounding spaces may be enjoyed beyond swimming. These
programs include media advertising, industry-oriented website development such
as www.swimmingpool.com™
and public relations campaigns. We use these programs as tools to
educate consumers and lead prospective pool owners to our
customers.
We
promote the growth of our customers’ businesses by offering comprehensive
support programs that include promotional tools and marketing support to help
our customers generate increased sales. Our uniquely tailored
programs include such features as customer lead generation, personalized
websites, brochures, marketing campaigns and business development
training. As a customer service, we also provide certain retail store
customers assistance with everything from site selection to store layout and
design to business management system implementation. These benefits
and other exclusive services are offered through our retail brand licensing
program called The Backyard Place®, which is one of
our key growth initiatives. In return for these services, customers
make commitments to meet minimum purchase levels, stock a minimum of nine
specific product categories and operate within The Backyard Place® guidelines
(including weekend hour requirements)
. We launched The Backyard Place® program in 2006
and we currently have over 120 agreements with retail store
customers. Our total sales to these customers grew 15% in 2009
compared to 2008.
In
addition to our efforts aimed at industry and customer growth, we strive to
operate more effectively by continuously focusing on improvements in our
operations such as product sourcing, procurement and logistics initiatives,
adoption of enhanced business practices and improved working capital
management. We have increased our product breadth (as described
in the “Customers and Products” section below) and expanded our sales center
networks through acquisitions, new sales center openings and expansions of
existing sales centers. Historically, acquisitions have been an
important source of sales growth.
3
Since
2005, we have opened 18 new sales centers (net of subsequent closings and
consolidations of new sales centers) and successfully completed 9 acquisitions
consisting of 74 sales centers (net of sales center closings and consolidations
within one year of acquisition). Given the current challenging
external environment, we did not open any new sales centers in 2009 and expect
to open only two new sales centers in 2010. We plan to continue to
selectively expand our domestic swimming pool distribution networks and to take
advantage of opportunities to further expand our domestic irrigation and
international swimming pool distribution networks via both acquisitions and new
sales center openings. We plan to make strategic acquisitions to
further penetrate existing markets and expand into both new geographic markets
and new product categories. For additional discussion of our recent
acquisitions, see Note 2 of “Notes to Consolidated Financial Statements,”
included in Item 8 of this Form 10-K.
Based
upon industry data, we believe our industry grew at a 2% to 6% annual rate for
the period between 2000 and 2005 but contracted each year between 2006 and
2009. Historically, our sales growth has exceeded the industry’s
growth rates and allowed us to increase market share. We believe that
our high service levels and expanded product offerings have also enabled us to
gain market share during the past four years as our industry
contracted. Going forward, we expect to realize sales growth higher
than the industry average due to increases in market share and further expansion
of our product offerings.
We
estimate that pricing inflation has averaged 1% to 3% annually in our industry
over the past 10 years. In 2010, we do not expect industry price
increases after experiencing above average inflationary increases in product
costs in 2008 and 2009. We generally pass industry price increases
through the supply chain and make strategic volume inventory purchases ahead of
vendor price increases. Based on the volume inventory purchases we
made ahead of vendor price increases in the second half of 2008, we realized a
favorable impact to gross margin in the first half of 2009. Since
there were no similar late season vendor price increases in 2009, we expect
tough gross margin comparisons to 2009 in the first half of 2010.
Customers
and Products
We serve
roughly 70,000 customers, none of which account for more than 1% of our
sales. We primarily serve five types of customers:
·
|
swimming
pool remodelers and builders;
|
·
|
retail
swimming pool stores;
|
·
|
swimming
pool repair and service businesses;
|
·
|
landscape
construction and maintenance contractors;
and
|
·
|
golf
courses.
|
The
majority of these customers are small, family owned businesses with relatively
limited capital resources. The current economic environment has had
the greatest impact on swimming pool remodelers and builders and landscape
construction companies. We have seen a modest contraction in our
customer base in these segments over the last three years.
We
conduct our operations through over 280 sales centers in North America and
Europe. Our primary markets, which have the highest concentration of swimming
pools, are California, Florida, Texas and Arizona, representing approximately
51% of our net sales in 2009. We use a combination of local and
international sales and marketing personnel to promote the growth of our
business and develop and strengthen our customers’ businesses. Our
sales and marketing personnel focus on developing customer programs and
promotional activities, creating and enhancing sales management tools and
providing product and market expertise. Our local sales personnel
work from the sales centers and are charged with understanding and meeting our
customers’ specific needs.
We offer
our customers more than 100,000 national brand and Pool Corporation branded
products. We believe that our selection of pool equipment, supplies,
chemicals, replacement parts, irrigation and landscape products and
complementary products is the most comprehensive in the industry. The
products we sell can be categorized as follows:
·
|
maintenance
products such as chemicals, supplies and pool
accessories;
|
·
|
repair
and replacement parts for cleaners, filters, heaters, pumps and
lights;
|
·
|
packaged
pool kits including walls, liners, braces and coping for in-ground and
above-ground pools;
|
4
·
|
pool
equipment and components for new pool construction and the remodeling of
existing pools;
|
·
|
irrigation
and landscape products, including professional lawn care equipment;
and
|
·
|
complementary
products, which consists of a number of product categories and
includes:
|
–
|
building
materials used for pool installations and remodeling, such as concrete,
plumbing and electrical components and pool surface and decking materials;
and
|
–
|
other
discretionary recreational and related outdoor lifestyle products that
enhance consumers’ use and enjoyment of outdoor living spaces, such as
pool toys and games, spas and
grills.
|
We track and monitor the
majority of our sales by various product lines and product categories, primarily
for consideration in incentive plan programs and to provide support for sales
and marketing efforts. We currently have over 300 product lines and
over 40 product categories. Based on our 2009 product
classifications, sales for our pool and spa chemicals product category as a
percentage of total net sales was 17% in 2009, 14% in 2008 and 12% in
2007. We attribute this growth to increases in our market share, a
shift in product mix resulting from the decline in construction related products
and chemical price increases. No other product category accounted for
10% or more of total net sales in any of the last three fiscal
years.
We
categorize our maintenance, repair and replacement products into the following
two groupings:
·
|
maintenance
and minor repair (non-discretionary);
and
|
·
|
major
repair and refurbishment (partially
discretionary).
|
Maintenance
and minor repair products are primarily non-discretionary in nature, meaning
that these items must be purchased by end users to maintain existing swimming
pools and landscaped areas. In 2009, the sale of maintenance and
minor repair products accounted for approximately 70% of our sales and gross
profits while approximately 30% of sales and gross profits were derived from the
replacement, construction and installation (equipment, materials, plumbing,
electrical, etc.) of pools and landscaping. This reflects a shift
toward more sales of maintenance and minor repair products due to the
significant declines in new pool construction over the past four
years. Historically, just over 50% of our total sales and gross
profits were related to maintenance and repair products.
With our
acquisition of National Pool Tile (NPT) in 2008, our focus in 2009 included
expanding the number of sales center locations that offer NPT’s tile and
composite pool finish products. Another recent example of our product
initiatives is the expansion of our replacement parts offerings. This
includes the continued expansion of our Pool Corporation branded products, which
has contributed to our improvement of gross margin.
Complementary product sales have also been an important factor in our historical base business sales growth, but have declined over the past several years since the majority of these products are related to construction activities or are discretionary by nature. We continue to identify other product categories that could become part of our complementary product offerings in the future. We typically introduce two to three categories each year in certain markets. We then evaluate the performance of these test categories and focus on those which we believe exhibit long-term growth potential. We intend to continue to expand our complementary products initiative by increasing the number of locations which offer complementary products, increasing the number of complementary products offered at certain locations and continuing a modest broadening of the product offerings on a company-wide basis.
Operating
Strategy
We
operate three distribution networks: the SCP network, the
Superior network and the Horizon network. The SCP network
consists of 168 sales centers, including 12 sales centers in Europe, the
Superior network consists of 62 sales centers and the Horizon network consists
of 57 sales centers. We distribute swimming pool supplies, equipment
and related leisure products through our SCP and Superior networks, and we
distribute irrigation and landscape products through our Horizon
network.
5
We
adopted the strategy of operating two distinct distribution networks within the
swimming pool marketplace primarily for two reasons:
1.
|
To
offer our customers a choice of different distributors, featuring
distinctive product selections and service personnel;
and
|
|
2.
|
To
increase the level of customer service and operational efficiency provided
by the sales centers in each network by promoting healthy competition
between the two networks.
|
We
evaluate our sales centers based upon their performance relative to
predetermined standards that include both financial and operational
measures. Our corporate support groups provide our field operations
with various services including customer and vendor related programs,
information systems support and expert resources to help them achieve their
goals. We believe our incentive programs and feedback tools, along
with the competitive nature of our internal networks, stimulate and enhance
employee performance.
Distribution
Our sales
centers are located near customer concentrations, typically in industrial,
commercial or mixed-use zones. Customers may pick up products at any
sales center location, or products may be delivered via our trucks or third
party carriers.
Our sales
centers maintain well-stocked inventories to meet customers’ immediate
needs. We utilize warehouse management technology to optimize
receiving, inventory control, picking, packing and shipping
functions.
We also
operate 10 centralized shipping locations that redistribute products we purchase
in bulk quantities to our sales centers or directly to customers.
Purchasing
and Suppliers
We enjoy
good relationships with our suppliers, who generally offer competitive pricing,
return policies and promotional allowances. It is customary in our
industry for manufacturers to seasonally offer extended payment terms to
qualifying purchasers such as POOL. These terms are typically available to us
for pre-season or early season purchases.
We
initiated a preferred vendor program in 1999 which encourages our buyers to
purchase products from a smaller number of vendors. We work closely
with these vendors to develop programs and services to better meet the needs of
our customers and to concentrate our purchasing activities. These
practices, together with a more comprehensive service offering, have resulted in
improved margins at the sales center level.
We
regularly evaluate supplier relationships and consider alternate sourcing to
assure competitive cost, service and quality standards. Our largest
suppliers include Pentair Corporation, Hayward Pool Products, Inc. and Zodiac
Pool Systems, Inc., which accounted for approximately 16%, 10% and 8%,
respectively, of the cost of products we sold in 2009.
Competition
Based on
industry knowledge and available data, management believes we are the largest
wholesale distributor of swimming pool and related backyard products and the
only truly national wholesale distributor focused on the swimming pool industry
in the United States. We are also one of the top three distributors
of landscape and irrigation products in the United States, and we compete
against one national wholesale distributor of these products. We face
intense competition from many regional and local distributors in our markets and
to a lesser extent, mass-market retailers and large pool supply retailers with
their own internal distribution networks.
Some
geographic markets we serve, particularly our four largest, higher density
markets in California, Florida, Texas and Arizona, are more competitive than
others. Barriers to entry in our industry are relatively low. We
compete with other distributors for rights to distribute brand-name
products. If we lose or are unable to obtain these rights, we might
be materially and adversely affected. We believe that the size of our operations
allows us to compete favorably for such distribution rights.
6
We
believe that the principal competitive factors in swimming pool and landscape
supply distribution are:
·
|
the
breadth and availability of products
offered;
|
·
|
the quality and level of customer
service;
|
·
|
the breadth and depth of sales and marketing
programs;
|
·
|
consistency and stability of business relationships with
customers;
|
·
|
competitive product pricing; and
|
·
|
access to commercial credit to finance business working
capital.
|
We
believe that we generally compete favorably with respect to each of these
factors.
Seasonality
and Weather
For a
discussion regarding seasonality and weather, see Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Seasonality and Quarterly Fluctuations,” of this Form 10-K.
Environmental,
Health and Safety Regulations
Our
business is subject to regulation under local fire codes and international,
federal, state and local environmental and health and safety requirements,
including regulation by the Environmental Protection Agency, the Consumer
Product Safety Commission, the Department of Transportation, the Occupational
Safety and Health Administration, the National Fire Protection Agency and the
International Maritime Organization. Most of these requirements govern the
packaging, labeling, handling, transportation, storage and sale of chemicals and
fertilizers. We store certain types of chemicals and/or fertilizers at each of
our sales centers and the storage of these items is strictly regulated by local
fire codes. In addition, we sell algaecides and pest control products that are
regulated as pesticides under the Federal Insecticide, Fungicide and Rodenticide
Act and various state pesticide laws. These laws are primarily related to
labeling, annual registration and licensing.
Employees
We
employed approximately 3,200 people at December 31, 2009. Given the seasonal
nature of our business, our peak employment period is the summer and depending
on expected sales levels, we add 200 to 500 employees to our work
force to meet seasonal demand.
Intellectual
Property
We
maintain both domestic and foreign registered trademarks primarily for our
private label products that are important to our current and future business
operations. We also own rights to several Internet domain names.
Geographic
Areas
Net sales
by geographic region were as follows for the past three fiscal years (in
thousands):
Year
Ended December 31,
|
||||||||
2009
|
2008
|
2007
|
||||||
United
States
|
$
|
1,393,513
|
$
|
1,626,869
|
$
|
1,774,771
|
||
International
|
146,281
|
156,814
|
153,596
|
|||||
$
|
1,539,794
|
$
|
1,783,683
|
$
|
1,928,367
|
Net
property and equipment by geographic region was as follows (in
thousands):
December
31,
|
||||||||
2009
|
2008
|
2007
|
||||||
United
States
|
$
|
27,840
|
$
|
28,931
|
$
|
30,505
|
||
International
|
3,592
|
4,117
|
3,718
|
|||||
$
|
31,432
|
$
|
33,048
|
$
|
34,223
|
7
Available
Information
Our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of
charge on our website at www.poolcorp.com as soon as reasonably practical after
we electronically file such reports with, or furnish them to, the Securities and
Exchange Commission.
Additionally,
we have adopted a Code of Business Conduct and Ethics, applicable to all
employees, officers and directors, which is available free of charge on our
website.
Cautionary
Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995
Our
disclosure and analysis in this report contains forward-looking information that
involves risks and uncertainties. Our forward-looking statements express our
current expectations or forecasts of possible future results or events,
including projections of future performance, statements of management’s plans
and objectives, future contracts, and forecasts of trends and other matters.
Forward-looking statements speak only as of the date of this filing, and we
undertake no obligation to update or revise such statements to reflect new
circumstances or unanticipated events as they occur. You can identify these
statements by the fact that they do not relate strictly to historic or current
facts and often use words such as “anticipate”, “estimate”, “expect”, “believe,”
“will likely result,” “outlook,” “project” and other words and expressions of
similar meaning. No assurance can be given that the results in any
forward-looking statements will be achieved and actual results could be affected
by one or more factors, which could cause them to differ materially. For these
statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform
Act.
Risk
Factors
Certain
factors that may affect our business and could cause actual results to differ
materially from those expressed in any forward-looking statements include the
following:
The
demand for our swimming pool and related outdoor lifestyle products has been and
may continue to be adversely affected by unfavorable economic
conditions.
In
economic downturns, the demand for swimming pool or leisure related products may
decline as discretionary consumer spending, the growth rate of pool eligible
households and swimming pool construction decline. Although maintenance
products and repair and replacement equipment that must be purchased by pool
owners to maintain existing swimming pools currently account for approximately
90% of our net sales and gross profits, the growth of this portion of our
business depends on the expansion of the installed pool base and could also be
adversely affected by decreases in construction activities similar to the trends
between late 2006 and 2009. A weakening economy may also cause deferrals
of discretionary replacement and refurbish activity. In addition,
even in generally favorable economic conditions, severe and/or prolonged
downturns in the housing market could have a material adverse impact on our
financial performance. Such downturns expose us to certain additional
risks, including but not limited to the risk of customer closures or
bankruptcies, which could shrink our potential customer base and inhibit our
ability to collect on those customers’ receivables.
We
believe that homeowners’ access to consumer credit, particularly as facilitated
by mortgage-backed financing markets, is a critical enabling factor in the
purchase of new pool and irrigation systems. The recent unfavorable
economic conditions and downturn in the housing market have resulted in
significant tightening of credit markets, which has limited the ability of
consumers to access financing for new swimming pool and irrigation
systems. If these trends continue or worsen, many consumers will
likely not be able to obtain financing for pool and irrigation projects, which
could negatively impact our sales of construction related products.
8
We
are susceptible to adverse weather conditions.
Weather
is one of the principal external factors affecting our business. For
example, unseasonably late warming trends in the spring or early cooling trends
in the fall can shorten the length of the pool season. Also,
unseasonably cool weather or extraordinary rainfall during the peak season can
decrease swimming pool use, installation and maintenance, as well as landscape
installations and maintenance. These weather conditions adversely affect sales
of our products. Drought conditions or water management initiatives may lead to
municipal ordinances related to water use restrictions, which could result in
decreased pool and irrigation system installations and negatively impact our
sales. While warmer weather conditions favorably impact our sales,
global warming trends and other significant climate changes can create more
variability in the short-term or lead to other unfavorable weather conditions
that could adversely impact our sales or operations. For a discussion
regarding seasonality and weather, see Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Seasonality and
Quarterly Fluctuations,” of this Form 10-K.
Our
distribution business is highly dependent on our ability to maintain favorable
relationships with suppliers.
As a
distribution company, maintaining favorable relationships with our suppliers is
critical to the success of our business. We believe that we add
considerable value to the swimming pool supply chain and landscape supply chain
by purchasing products from a large number of manufacturers and distributing the
products to a highly fragmented customer base on conditions that are more
favorable than these customers could obtain on their own. We believe
that we currently enjoy good relationships with our suppliers, who generally
offer us competitive pricing, return policies and promotional
allowances. However, our inability to maintain favorable
relationships with our suppliers could have an adverse effect on our
business.
Our
largest suppliers are Pentair Corporation, Hayward Pool Products, Inc. and
Zodiac Pool Systems, Inc., which accounted for approximately 16%, 10% and 8%,
respectively, of the costs of products we sold in 2009. A decision by
several suppliers, acting in concert, to sell their products directly to retail
customers and other end-users of their products, bypassing distribution
companies like ours, would have an adverse effect on our
business. Additionally, the loss of a single significant supplier due
to financial failure or a decision to sell exclusively to other distributors,
retail customers or end user consumers could also adversely affect our
business. We dedicate significant resources to promote the benefits
and affordability of pool ownership, which we believe greatly benefits our
swimming pool customers and suppliers.
We
face intense competition both from within our industry and from other leisure
product alternatives.
We face
competition from both inside and outside of our industry. Within our
industry, we compete against various regional and local distributors and, to a
lesser extent, mass market retailers and large pool or landscape supply
retailers. Outside of our industry, we compete with sellers of other
leisure product alternatives, such as boats and motor homes, and with other
companies who rely on discretionary homeowner expenditures, such as home
remodelers. New competitors may emerge as there are low barriers to
entry in our industry. Some geographic markets that we serve,
particularly our four largest, higher density markets in California, Florida,
Texas and Arizona, representing approximately 51% of our net sales in 2009, also
tend to be more competitive than others.
More
aggressive competition by mass merchants and large pool or landscape supply
retailers could adversely affect our sales.
Mass market
retailers today carry a limited range of, and devote a limited amount of
shelf space to, merchandise and products targeted to our
industry. Historically, mass market retailers
have generally expanded by adding new stores and product breadth, but their
product offering of pool and landscape related products has remained relatively
constant. Should mass market retailers increase their focus on the
pool or professional landscape industries, or increase the breadth of their pool
and landscape related product offerings, they may become a more significant
competitor for direct and end-use customers which could have an adverse
impact on our business. We may face additional competitive pressures
if large pool or landscape supply retailers look to expand their customer base
to compete more directly within the distribution channel.
9
We
depend on key personnel.
We
consider our employees to be the foundation for our growth and success. As such,
our future success depends in large part on our ability to attract, retain and
motivate qualified personnel, including our executive officers and key
management personnel. If we are unable to attract and retain key personnel, our
operating results could be adversely affected.
Past
growth may not be indicative of future growth.
Historically,
we have experienced substantial sales growth through acquisitions, market share
gains and new sales center openings that have increased our size, scope and
geographic distribution. During the past five fiscal years, we have opened 18
new sales centers (net of subsequent closings and consolidations of new sales
centers) and have completed 9 acquisitions. These acquisitions have added 74
sales centers (net of sales center closings and consolidations within one year
of acquisition) to our distribution networks. Between 2007 and 2009, we also
closed or consolidated 12 existing sales centers. While we contemplate continued
growth through acquisitions and internal expansion, no assurance can be made as
to our ability to:
·
|
penetrate
new markets;
|
·
|
identify
appropriate acquisition candidates;
|
·
|
complete
acquisitions on satisfactory terms and successfully integrate acquired
businesses;
|
·
|
obtain
financing;
|
·
|
generate
sufficient cash flows to support expansion plans and general operating
activities;
|
·
|
maintain
favorable supplier arrangements and relationships;
and
|
·
|
identify
and divest assets which do not continue to create value consistent with
our objectives.
|
If we do
not manage these potential difficulties successfully, our operating results
could be adversely affected.
The
growth of our business depends on effective marketing programs.
The
growth of our business depends on the expansion of the installed pool base.
Thus, an important part of our strategy is to promote the growth of the pool
industry through our extensive advertising and promotional programs that attempt
to raise consumer awareness regarding the benefits and affordability of pool
ownership, the ease of pool maintenance and the many ways in which a pool may be
enjoyed beyond swimming. These programs include media advertising, website
development such as www.swimmingpool.com™
and public relations campaigns. We believe these programs benefit the entire
supply chain from our suppliers to our customers.
We also
promote the growth of our customers’ businesses through comprehensive support
programs that offer promotional tools and marketing support to help generate
increased sales for our customers. Our programs include such features as
personalized websites, brochures, marketing campaigns and business development
training. We also provide certain retail store customers with assistance in site
selection, store layout and design and business management system
implementation. Our inability to sufficiently develop effective advertising,
marketing and promotional programs to succeed in a weakened economic environment
and an increasingly competitive marketplace, in which we (and our entire supply
chain) also compete with other luxury product alternatives, could have a
material adverse effect on our business.
Our
business is highly seasonal.
In 2009,
approximately 67% of our net sales and over 100% of our operating income were
generated in the second and third quarters of the year, which represent the peak
months of swimming pool use, installation, remodeling and repair. Our sales are
substantially lower during the first and fourth quarters of the year, when we
may incur net losses.
The
nature of our business subjects us to compliance with environmental, health,
transportation and safety regulations.
We are
subject to regulation under federal, state and local environmental, health,
transportation and safety requirements, which govern such things as packaging,
labeling, handling, transportation, storage and sale of chemicals and
fertilizers. For example, we sell algaecides and pest control products that are
regulated as pesticides under the Federal Insecticide, Fungicide and Rodenticide
Act and various state pesticide laws. These laws are primarily related to
labeling, annual registration and licensing.
10
Failure
to comply with these laws and regulations may result in the assessment of
administrative, civil and criminal penalties or the imposition of injunctive
relief. Moreover, compliance with such laws and regulations in the future could
prove to be costly, and there can be no assurance that we will not incur such
costs in material amounts. These laws and regulations have changed substantially
and rapidly over the last 20 years and we anticipate that there will be
continuing changes. The clear trend in environmental, health, transportation and
safety regulation is to place more restrictions and limitations on activities
that impact the environment, such as the use and handling of chemical
substances. Increasingly, strict restrictions and limitations have resulted in
higher operating costs for us and it is possible that the costs of compliance
with such laws and regulations will continue to increase. We will attempt to
anticipate future regulatory requirements that might be imposed and we will plan
accordingly to remain in compliance with changing regulations and to minimize
the costs of such compliance.
We
store chemicals, fertilizers and other combustible materials that involve fire,
safety and casualty risks.
We store
chemicals and fertilizers, including certain combustible, oxidizing compounds,
at our sales centers. A fire, explosion or flood affecting one of our facilities
could give rise to fire, safety and casualty losses and related liability
claims. We maintain what we believe is prudent insurance protection. However, we
cannot guarantee that our insurance coverage will be adequate to cover future
claims that may arise or that we will be able to maintain adequate insurance in
the future at rates we consider reasonable. Successful claims for which we are
not fully insured may adversely affect our working capital and profitability. In
addition, changes in the insurance industry have generally led to higher
insurance costs and decreased availability of coverage.
We
conduct business internationally, which exposes us to additional
risks.
Our
international operations expose us to certain additional risks,
including:
·
|
difficulty
in staffing international subsidiary
operations;
|
·
|
different
political and regulatory
conditions;
|
·
|
currency
fluctuations;
|
·
|
adverse
tax consequences; and
|
·
|
dependence
on other economies.
|
We source
certain products we sell, including our Pool Corporation branded products, from
Asia and other international sources. There is a greater risk that we may not be
able to access products in a timely and efficient manner, and we may also be
subject to certain trade restrictions that prevent us from obtaining products.
Fluctuations in other factors relating to international trade, such as tariffs,
currency exchange rates, transportation costs and inflation are additional risks
for our international operations.
A
terrorist attack or the threat of a terrorist attack could have a material
adverse effect on our business.
Discretionary
spending on leisure product offerings such as ours is generally adversely
affected during times of economic or political uncertainty. The potential for
terrorist attacks, the national and international responses to terrorist
attacks, and other acts of war or hostility could create these types of
uncertainties and negatively impact our business for the short or long-term in
ways that cannot presently be predicted.
None.
11
We lease
the POOL corporate offices, which consist of approximately 50,000 square feet of
office space in Covington, Louisiana, from an entity in which we have a 50%
ownership interest. We own three sales center facilities in Florida and one in
Texas. We lease all of our other properties and the majority of our leases have
three to seven year terms. As of December 31, 2009, we had 18 leases with
remaining terms longer than seven years that expire between 2017 and 2027. Most
of our leases contain renewal options, some of which involve rent increases. In
addition to minimum rental payments, which are set at competitive rates, certain
leases require reimbursement for taxes, maintenance and insurance.
Our sales
centers range in size from approximately 2,000 square feet to 100,000 square
feet and generally consist of warehouse, counter, display and office space. Our
centralized shipping locations (CSLs) range in size from 16,000 square feet to
78,000 square feet.
We
believe that our facilities are well maintained, suitable for our business and
occupy sufficient space to meet our operating needs. As part of our normal
business, we regularly evaluate sales center performance and site suitability
and may relocate a sales center or consolidate two locations if a sales center
is redundant in a market, under performing or otherwise deemed unsuitable. We do
not believe that any single lease is material to our operations.
The table
below summarizes the changes in our sales centers during the year ended
December 31, 2009:
Network
|
12/31/08
|
New
Locations
|
Consolidated
&
Closed
Locations (1)
|
Acquired
Locations
(2)
|
Converted
Locations (3)
|
12/31/09
|
||||||
SCP
|
146
|
-
|
(1
|
)
|
-
|
2
|
147
|
|||||
Superior
|
60
|
-
|
(3
|
)
|
7
|
(2
|
)
|
62
|
||||
Horizon
|
61
|
-
|
(4
|
)
|
-
|
-
|
57
|
|||||
Total
Domestic
|
267
|
-
|
(8
|
)
|
7
|
-
|
266
|
|||||
SCP
International
|
21
|
-
|
-
|
-
|
-
|
21
|
||||||
Total
|
288
|
-
|
(8
|
)
|
7
|
-
|
287
|
(1)
|
Consolidated
sales centers are those locations where we expect to transfer the majority
of the existing business to our nearby sales center locations. During
2009, we consolidated seven sales centers and closed one sales
center.
|
(2)
|
We
added 10 sales centers through our acquisition of General Pool & Spa
Supply (GPS) in October 2009. We have consolidated three of
these locations with existing sales
centers.
|
(3)
|
In
2009, we converted two existing sales centers in Florida from our Superior
network to our SCP network.
|
12
The table
below identifies the number of sales centers in each state or country by
distribution network as of December 31, 2009:
Location
|
SCP
|
Superior
|
Horizon
|
Total
|
|||
United
States
|
|||||||
California
|
24
|
21
|
20
|
65
|
|||
Florida
|
31
|
6
|
-
|
37
|
|||
Texas
|
16
|
4
|
11
|
31
|
|||
Arizona
|
6
|
4
|
10
|
20
|
|||
Georgia
|
7
|
2
|
-
|
9
|
|||
Tennessee
|
4
|
3
|
-
|
7
|
|||
Washington
|
1
|
-
|
6
|
7
|
|||
Alabama
|
4
|
2
|
-
|
6
|
|||
Nevada
|
2
|
2
|
2
|
6
|
|||
New
York
|
6
|
-
|
-
|
6
|
|||
Louisiana
|
5
|
-
|
-
|
5
|
|||
New
Jersey
|
3
|
2
|
-
|
5
|
|||
Ohio
|
2
|
3
|
-
|
5
|
|||
Pennsylvania
|
4
|
1
|
-
|
5
|
|||
Colorado
|
1
|
1
|
2
|
4
|
|||
Illinois
|
3
|
1
|
-
|
4
|
|||
Indiana
|
2
|
2
|
-
|
4
|
|||
Missouri
|
3
|
1
|
-
|
4
|
|||
North
Carolina
|
3
|
1
|
-
|
4
|
|||
Oklahoma
|
2
|
1
|
-
|
3
|
|||
Oregon
|
-
|
-
|
3
|
3
|
|||
South
Carolina
|
2
|
1
|
-
|
3
|
|||
Virginia
|
2
|
1
|
-
|
3
|
|||
Arkansas
|
2
|
-
|
-
|
2
|
|||
Idaho
|
-
|
-
|
2
|
2
|
|||
Massachusetts
|
2
|
-
|
-
|
2
|
|||
Michigan
|
2
|
-
|
-
|
2
|
|||
Minnesota
|
1
|
1
|
-
|
2
|
|||
Connecticut
|
1
|
-
|
-
|
1
|
|||
Iowa
|
1
|
-
|
-
|
1
|
|||
Kansas
|
1
|
-
|
-
|
1
|
|||
Kentucky
|
-
|
1
|
-
|
1
|
|||
Maryland
|
1
|
-
|
-
|
1
|
|||
Mississippi
|
1
|
-
|
-
|
1
|
|||
Nebraska
|
1
|
-
|
-
|
1
|
|||
New
Mexico
|
1
|
-
|
-
|
1
|
|||
Utah
|
-
|
-
|
1
|
1
|
|||
Wisconsin
|
-
|
1
|
-
|
1
|
|||
Total
United States
|
147
|
62
|
57
|
266
|
|||
International
|
|||||||
Canada
|
8
|
-
|
-
|
8
|
|||
France
|
5
|
-
|
-
|
5
|
|||
Portugal
|
3
|
-
|
-
|
3
|
|||
United
Kingdom
|
2
|
-
|
-
|
2
|
|||
Italy
|
1
|
-
|
-
|
1
|
|||
Spain
|
1
|
-
|
-
|
1
|
|||
Mexico
|
1
|
-
|
-
|
1
|
|||
Total
International
|
21
|
-
|
-
|
21
|
|||
Total
|
168
|
62
|
57
|
287
|
13
From time
to time, we are subject to various claims and litigation arising in the ordinary
course of business, including product liability, personal injury, commercial,
contract and employment matters. While the outcome of any litigation is
inherently unpredictable, we do not believe, based on currently available facts,
that the ultimate resolution of any of these matters will have a material
adverse impact on our financial condition, results of operations or cash
flows.
Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Our
common stock is traded on the NASDAQ Global Select Market under the symbol
“POOL”. On February 19, 2010, there were approximately
11,831 holders of record of our common stock. The table below sets
forth the high and low sales prices of our common stock as well as dividends
declared for each quarter during the last two fiscal years.
Dividends
|
||||||||||
High
|
Low
|
Declared
|
||||||||
Fiscal
2009
|
||||||||||
First
Quarter
|
$
|
19.00
|
$
|
11.39
|
$
|
0.13
|
||||
Second
Quarter
|
18.47
|
13.58
|
0.13
|
|||||||
Third
Quarter
|
24.57
|
15.79
|
0.13
|
|||||||
Fourth
Quarter
|
23.62
|
17.75
|
0.13
|
|||||||
Fiscal
2008
|
||||||||||
First
Quarter
|
$
|
24.64
|
$
|
17.99
|
$
|
0.12
|
||||
Second
Quarter
|
22.43
|
17.76
|
0.13
|
|||||||
Third
Quarter
|
25.87
|
16.65
|
0.13
|
|||||||
Fourth
Quarter
|
23.39
|
13.36
|
0.13
|
We
initiated quarterly dividend payments to our shareholders in the second quarter
of 2004 and we have continued payments in each subsequent quarter. Our Board of
Directors (our Board) has increased the dividend amount five times including in
the fourth quarter of 2004 and annually in the second quarter of 2005 through
2008. Future dividend payments will be at the discretion of our Board, after
considering various factors, including our earnings, capital requirements,
financial position, contractual restrictions and other relevant business
considerations. We cannot assure shareholders or potential investors that
dividends will be declared or paid any time in the future if our Board
determines that there is a better use of those funds.
Stock
Performance Graph
The
information included under the caption “Stock Performance Graph” in this
Item 5 of this Annual Report on Form 10-K is not deemed to be
“soliciting material” or to be “filed” with the SEC or subject to Regulation 14A
or 14C under the Securities Exchange Act of 1934 (the 1934 Act) or to the
liabilities of Section 18 of the 1934 Act, and will not be deemed to
be incorporated by reference into any filing under the Securities Act of 1933 or
the 1934 Act, except to the extent we specifically incorporate it by
reference into such a filing.
The graph
below compares the total stockholder return on our common stock for the last
five fiscal years with the total return on the NASDAQ US Index and the S&P
MidCap 400 Index for the same period, in each case assuming the investment of
$100 on December 31, 2004 and the reinvestment of all dividends. We believe the
S&P MidCap 400 Index includes companies with capitalization comparable to
ours. Additionally, we chose the S&P MidCap 400 Index for comparison, as
opposed to an industry index, because we do not believe that we can reasonably
identify a peer group or a published industry or line-of-business index that
contains companies in a similar line of business.
14

Base
|
INDEXED
RETURNS
|
|||||
Period
|
Years
Ending
|
|||||
Company
/ Index
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
Pool
Corporation
|
100
|
117.77
|
125.16
|
64.33
|
59.80
|
65.41
|
S&P
MidCap 400 Index
|
100
|
112.56
|
124.17
|
134.08
|
85.50
|
117.46
|
NASDAQ
US Index
|
100
|
101.33
|
114.01
|
123.71
|
73.11
|
105.61
|
Purchases
of Equity Securities
The table
below summarizes the repurchases of our common stock in the fourth quarter of
2009.
|
|
|||||||||
|
||||||||||
Period
|
Total
number of shares
purchased(1) |
Average
price paid per
share |
Total
number of shares purchased as
part of publicly |
Maximum
approximate dollar value that
may yet be |
||||||
October
1-31, 2009
|
-
|
$
|
-
|
-
|
$
|
52,987,067
|
||||
November
1-30, 2009
|
-
|
$
|
-
|
-
|
$
|
52,987,067
|
||||
December
1-31, 2009
|
-
|
$
|
-
|
-
|
$
|
52,987,067
|
||||
Total
|
-
|
$
|
-
|
-
|
(1)
|
These
shares may include shares of our common stock surrendered to us by
employees in order to satisfy tax withholding obligations in connection
with certain exercises of employee stock options and/or the exercise price
of such options granted under our share-based compensation
plans. There were no shares surrendered for this purpose in the
fourth quarter of 2009.
|
(2)
|
In
July 2002, our Board authorized $50.0 million for the repurchase of
shares of our common stock in the open market. In August 2004, November
2005 and August 2006, our Board increased the authorization for the
repurchase of shares of our common stock in the open market to a total of
$50.0 million from the amounts remaining at each of those dates. In
November 2006 and August 2007, our Board increased the authorization for
the repurchase of shares of our common stock in the open market to a total
of $100.0 million from the amounts remaining at each of those
dates.
|
(3)
|
In
2009, we did not purchase any shares under our Board authorized
plan. As of February 22, 2010, $53.0 million of the authorized
amount remained available.
|
15
The table
below sets forth selected financial data from the Consolidated Financial
Statements. You should read this information in conjunction with the discussions
in Item 7 of this Form 10-K and with the Consolidated Financial Statements and
accompanying Notes in Item 8 of this Form 10-K.
Year
Ended December 31, (1)
|
||||||||||||||||
(in
thousands, except per share data)
|
2009(2)
|
2008
|
2007
|
2006
|
2005(3)
|
|||||||||||
Statement
of Income Data
|
||||||||||||||||
Net
sales
|
$
|
1,539,794
|
$
|
1,783,683
|
$
|
1,928,367
|
$
|
1,909,762
|
$
|
1,552,659
|
||||||
Operating
income
|
88,440
|
115,476
|
133,774
|
167,382
|
135,363
|
|||||||||||
Net
income
|
19,202
|
56,956
|
69,394
|
95,024
|
80,455
|
|||||||||||
Earnings
per share:
|
||||||||||||||||
Basic
|
$
|
0.39
|
$
|
1.19
|
$
|
1.42
|
$
|
1.83
|
$
|
1.53
|
||||||
Diluted
|
$
|
0.39
|
$
|
1.17
|
(4)
|
$
|
1.37
|
$
|
1.74
|
$
|
1.44
|
(4)
|
||||
Cash
dividends declared
|
||||||||||||||||
per
common share
|
$
|
0.52
|
$
|
0.51
|
$
|
0.465
|
$
|
0.405
|
$
|
0.34
|
||||||
Balance Sheet Data(5)
|
||||||||||||||||
Working
capital
|
$
|
230,804
|
$
|
294,552
|
$
|
250,849
|
$
|
227,631
|
$
|
193,525
|
||||||
Total
assets
|
743,099
|
830,906
|
814,854
|
774,562
|
740,850
|
|||||||||||
Total
long-term debt,
|
||||||||||||||||
including
current portion
|
248,700
|
307,000
|
282,525
|
191,157
|
129,100
|
|||||||||||
Stockholders'
equity(6)
|
252,187
|
241,734
|
208,791
|
277,684
|
281,724
|
|||||||||||
Other
|
||||||||||||||||
Base
business sales change(7)
|
(15
|
)%
|
(9
|
)%
|
(1
|
)%
|
10
|
%
|
14
|
%
|
||||||
Number
of sales centers
|
287
|
288
|
281
|
274
|
246
|
(1)
|
During
the years 2005 to 2009, we successfully completed 9 acquisitions
consisting of 74 sales centers. For information about our recent
acquisitions, see Note 2 of “Notes to Consolidated Financial
Statements,” included in Item 8 of this Form 10-K. Our results
were negatively impacted between 2007 and 2009 due to the adverse external
market conditions, which included downturns in the housing market and
overall economy that led to significant declines in pool and irrigation
construction activities and deferred discretionary replacement purchases
by consumers.
|
(2)
|
The
2009 net income and earnings per share amounts include the impact of a
$26.5 million equity loss that we recognized in September 2009
related to our pro rata share of Latham Acquisition Corporation’s (LAC)
non-cash goodwill and other intangible asset impairment
charge. The impact of this impairment charge was a $0.54 per
share decrease in diluted earnings per share compared to
2008. The recognized loss resulted in the full write-off of our
equity method investment in LAC. For additional information
about our equity method investment in LAC, see Note 1 of “Notes to
Consolidated Financial Statements,” included in Item 8 of this Form
10-K.
|
(3)
|
As adjusted to reflect the impact of share-based compensation expense related to the adoption of Accounting Standards Codification 718, Compensation – Stock Compensation, using the modified retrospective transition method. |
(4)
|
As
adjusted for the adoption of ASC 260-10-45-61A, which resulted in a $0.01
decrease in our diluted earnings per share for 2008 and 2005 due to
rounding. For additional
information, see Note 1 of “Notes to Consolidated Financial
Statements,” included in Item 8 of this Form
10-K.
|
(5)
|
The
2005 balance sheet data has been adjusted to correct the classification of
our deferred tax balances.
|
(6)
|
In
June 2006, the Financial Accounting Standards Board (FASB) issued guidance
for accounting for uncertainty in income taxes. The beginning
stockholders’ equity balance in 2007 reflected a reduction to retained
earnings of approximately $0.5 million related to the implementation
of this guidance.
|
(7)
|
For
a discussion regarding our calculation of base business sales, see Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results
of Operations - RESULTS OF OPERATIONS,” of this
Form 10-K.
|
16
2009
FINANCIAL OVERVIEW
Financial
Results
We
believe our 2009 financial results reflect our ability to capitalize on our
financial and operational strengths and provide evidence of our resiliency given
the most difficult external market environment ever faced by our
industry. We achieved many of our 2009 objectives by focusing on
disciplined pricing and purchasing strategies (driving record gross margin),
rebalancing inventories and improving working capital management (leading to
record cash from operations) and controlling costs relative to our current
sales levels. We believe that we realized continued market share
gains, which we attribute to our high service levels coupled with growth
initiatives that included the expansion of product category offerings in tile
and replacement parts.
Net sales
decreased 14% compared to 2008 due to a 15% decline in base business sales,
which reflects the prolonged impact of lower pool and irrigation construction
activity, greater deferred discretionary replacement activity and unfavorable
weather and currency fluctuations. These reductions were partially
offset by an increase in certain maintenance and repair product sales,
inflationary price increases that we passed through the supply chain and sales
for new drains and related safety products as a result of the Virginia Graeme
Baker Pool and Spa Safety Act (VGB Act). For a discussion of our base
business calculation, see the RESULTS OF OPERATIONS section below.
Gross
profit as a percentage of net sales (gross margin) increased 30 basis points to
29.2% in 2009 as favorable shifts in product mix and continued improvements in
margin management practices helped offset negative pressures from the
competitive pricing environment.
Selling
and administrative expenses (operating expenses) for 2009 decreased 10% compared
to 2008. This decrease reflects the impact of cost control
initiatives, including lower payroll related, variable and discretionary
expenses, and reduced delivery and vehicle operating costs. These results
include $1.4 million of non-cash charges in the second half of 2009 related
to the closure and consolidation of certain sales centers between September and
December 2009.
Operating
income declined 23% to $88.4 million in 2009, while operating income as a
percentage of net sales (operating margin) decreased to 5.7% in 2009 compared to
6.4% in 2008. Interest expense, net declined $9.2 million
compared to 2008 due primarily to a 41% decrease in interest expense and
$1.8 million of foreign currency transaction gains.
As we
reported in our third quarter 2009 results, we recognized a $26.5 million
equity loss related to our pro rata share of Latham Acquisition Corporation’s
(LAC) non-cash goodwill and other intangible asset impairment
charge. Since our pro-rata share of this charge exceeded the
$26.5 million recorded value of our investment in LAC as of
September 1, 2009, the recognized loss reflected the full write-off of
the investment. Prior to this, we had recognized an equity loss of
$2.2 million related to our share of LAC’s loss from ongoing operations for
the eight months ended August 2009. In total, we recognized an
equity loss of $28.7 million for LAC in 2009. This compares to
an equity loss of $1.7 million recognized in fiscal 2008. LAC
filed for bankruptcy in December 2009 and its Plan of Reorganization was
approved by the United States Bankruptcy Court for the District of Delaware in
January 2010, allowing it to emerge from bankruptcy. As of the
date of the approval, we no longer have an equity interest in LAC and will not
recognize any impact related to LAC’s future earnings or losses. We
did not recognize any tax benefits related to the write-down of our equity
investment in LAC.
Earnings
per share for 2009 was $0.39 per diluted share on net income of
$19.2 million, compared to earnings per share of $1.17 per diluted share on
net income of $57.0 million in 2008. The $0.78 decrease in
diluted earnings per share includes a decline of approximately $0.59 per diluted
share related to our equity investment in LAC, $0.54 of which is related to our
pro-rata share of LAC’s impairment charge.
17
Financial
Position and Liquidity
Cash
provided by operations increased $20.0 million to $113.3 million in
2009. In January 2009, we paid $30.0 million for our
deferred third and fourth quarter 2008 federal income tax
payments. We also paid $26.0 million in 2009 for our third and
fourth quarter 2009 estimated taxes. Excluding this
$56.0 million combined impact of timing differences related to 2008 and
2009 estimated federal income tax payments, cash from operations improved
$76.0 million in 2009. This improvement is due to our focused
management of working capital and reflects the decrease in inventory discussed
below. Cash provided by operations helped fund the following in
2009:
·
|
$10.9 million
for acquisitions, including our acquisition of General Pool & Spa
Supply (GPS) in October 2009;
|
·
|
debt
repayments of $79.1 million, which helped lower our borrowing
costs;
|
·
|
quarterly
cash dividend payments to shareholders, which totaled $25.3 million
for the year; and
|
·
|
capital
expenditures of $7.2
million.
|
Total net receivables decreased 17% to $96.4 million at December 31, 2009 from $115.6 million at December 31, 2008 due to the lower sales, a shift toward more cash sales as a result of tighter credit terms and a $2.3 million decrease in the allowance for doubtful accounts, which reflects write-offs of certain accounts that were fully reserved and some improvement in our past due receivable balances year over year. Days sales outstanding (DSO) decreased to 34.9 days at December 31, 2009 from 36.3 days at December 31, 2008.
Our
inventory levels decreased 12% to $355.5 million as of
December 31, 2009 compared to $405.9 million as of
December 31, 2008. Excluding approximately
$8.0 million of inventory related to the acquisition of GPS, inventories
declined 14% year over year due to the success of our inventory rebalancing
efforts and the decrease in sales. Our inventory turns, as calculated on a
trailing twelve month basis, slowed to 3.0 times as of
December 31, 2009 compared to 3.1 times as of
December 31, 2008.
Current
Trends
Continuing
adverse economic trends have significantly impacted our
industry. These trends include a slowdown in the domestic housing
market, with lower housing turnover, sharp drops in new home construction, home
value deflation in many markets and a significant tightening of consumer and
commercial credit. Additionally, general economic conditions have
been weak, including declines in Gross Domestic Product (GDP) during the first
nine months of 2009 and high unemployment rates. Some of the factors
that help mitigate the impact of these negative trends on our business include
the following:
·
|
the
majority of our business is driven by the ongoing maintenance and repair
of existing pools and landscaped areas, with approximately 10% of our
sales and gross profits tied to new pool or irrigation construction in
2009 (as our sales related to new construction activity have declined
between 2006 and 2009, the proportion of our net sales represented by
maintenance, repair and replacement (MRR) products has increased from over
60% to approximately 90%); and
|
·
|
we
believe our service-oriented model, and the investments in our business we
are able to make given our financial strength, helps us gain market
share.
|
Despite
these mitigating factors, the negative trends noted above have significantly
impacted a number of our key markets, including California, Florida and Arizona,
with a more recent adverse impact in Texas and other states. We estimate that
these trends resulted in the following decreases in new pool construction in the
United States since peaking in 2005 at approximately 210,000 new
units:
2009
|
2008
|
2007
|
2006
|
|||||
Estimated
new units
|
45,000
|
90,000
|
150,000
|
200,000
|
||||
Unit
decrease
|
(45,000
|
)
|
(60,000
|
)
|
(50,000
|
)
|
(10,000
|
)
|
%
change from prior year units
|
(50
|
)%
|
(40
|
)%
|
(25
|
)%
|
(5
|
)%
|
18
Since
these trends worsened from 2006 through 2009, they had a more pronounced impact
on our results in 2008 and 2009. However, as evidenced by moderating
base business sales declines throughout 2009 in Florida, California and Arizona
(including some month over month sales growth and essentially flat fourth
quarter sales in Florida compared to the same periods in 2008), we believe these
trends have begun to level off in certain major pool markets first impacted by
the housing market downturn.
OUTLOOK
Our key
2010 objectives are consistent with 2009 and include the following:
·
|
realizing
market share growth;
|
·
|
managing
purchasing and pricing strategies to maximize gross
margin;
|
·
|
tightly
controlling expenses and working capital relative to sales levels;
and
|
·
|
maximizing
cash flow generation to reduce
debt.
|
While we
believe that the level of declines in new construction activity peaked in 2009,
we expect the ongoing housing market and general economic downturns will
continue to pressure new pool and irrigation construction activity in
2010. However, we anticipate a relatively stable maintenance market
based on the increased installed based of swimming pools and the potential for
higher replacement and refurbish activity due to recent pent-up demand caused by
consumer’s decisions to defer discretionary purchases. We expect that
sales levels relative to 2009 will be
lower in the first quarter of 2010, but should gradually improve throughout
the remainder of the year with comparatively higher sales levels anticipated in
the second half of 2010. The first half of 2009 included
approximately $17.0 million of increased sales for new drains and related
safety products as a result of the Virginia Graeme Baker Pool and Spa Safety Act
(VGB Act), and we do not expect any significant sales activity related to the
VGB Act in 2010.
In 2010, we do not
anticipate any inflationary product cost increases. Given the
competitive pricing environment and the favorable impact to gross margin in the
first half of 2009 based on our volume inventory purchases ahead of
vendor price increases in the second half of 2008, we believe gross margin could
drop off modestly in the first half of 2010. However, we expect gross
margin will be essentially flat for the full year compared to 2009.
While we
continue to drive targeted expense reductions, the rate of these decreases
should continue to moderate throughout 2010 as we lap more of the impact of cost
measures implemented in 2009. In 2010, we expect interest expense
will continue to decline based on lower projected average
borrowings. Excluding any acquisition activity, we plan to open two
new sales centers in 2010.
Based on
current trends including the unfavorable weather conditions during the first two
months of 2010, we project that 2010 earnings per share will be in the range of
$1.00 to $1.15 per diluted share. This range includes our expectation
for a higher seasonal loss per diluted share in the first quarter of 2010
compared to the same period in 2009, with gradually improving year on year
comparisons as 2010 progresses. The lower end of this range assumes
earnings results consistent with fiscal 2009, but includes the comparative
benefits from lower expected interest expense, the projected accretive impact of
the GPS acquisition of approximately $0.02 per diluted share and the fact that
there will be no impact from LAC since we no longer have an equity interest in
LAC as of January 2010.
We expect
cash provided by operations will approximate net income for fiscal 2010, but
will be comparatively lower than 2009 because we will not realize the same level
of improvements from our ongoing working capital management
initiatives.
The
forward-looking statements in this Outlook section are subject to significant
risks and uncertainties, including changes in the economy and the housing
market, the sensitivity of our business to weather conditions, our ability to
maintain favorable relationships with suppliers and manufacturers, competition
from other leisure product alternatives and mass merchants, and other risks
detailed in Item 1A of this Form 10-K.
19
CRITICAL
ACCOUNTING ESTIMATES
We
prepare our Consolidated Financial Statements in accordance with U.S. generally
accepted accounting principles (GAAP), which requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Management identifies critical accounting estimates as:
·
|
those
that require the use of assumptions about matters that are inherently and
highly uncertain at the time the estimates are made;
and
|
·
|
those
for which changes in the estimate or assumptions, or the use of different
estimates and assumptions, could have a material impact on our
consolidated results of operations or financial
condition.
|
Management
has discussed the development, selection and disclosure of our critical
accounting estimates with the Audit Committee of our Board. We believe the
following critical accounting estimates require us to make the most difficult,
subjective or complex judgments.
Allowance
for Doubtful Accounts
We
maintain an allowance for doubtful accounts for an estimate of the losses we
will incur if our customers do not make required payments. We perform periodic
credit evaluations of our customers and typically do not require collateral.
Consistent with industry practices, we generally 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. The extended terms
usually require payments in equal installments in April, May and June or May and
June, depending on geographic location. Credit losses have generally been within
or better than our expectations.
As our
business is seasonal, our customers’ businesses are also seasonal. Sales are
lowest in the winter months and our past due accounts receivable balance as a
percentage of total receivables generally increases during this time. We provide
reserves for uncollectible accounts based on the accounts receivable aging
ranging from 0.1% for amounts currently due up to 100% for specific accounts
more than 60 days past due.
At the
end of each quarter, we perform a reserve analysis of all accounts with past due
balances greater than $20,000. Additionally, we perform a separate reserve
analysis on the balance of our accounts receivables with emphasis on the
remainder of the past due portion of the aging. As we review these past due
accounts, we evaluate collectibility based on a combination of factors,
including:
·
|
aging
statistics and trends;
|
·
|
customer
payment history;
|
·
|
independent
credit reports; and
|
·
|
discussions
with customers.
|
During
the year, we write off account balances when we have exhausted reasonable
collection efforts and determined that the likelihood of collection is remote.
Such write-offs are charged against our allowance for doubtful accounts. In the
past five years, write-offs have averaged approximately 0.2% of net sales
annually. However, write-offs as a percentage of net sales was 0.4%
in 2009 and 0.3% in 2008, reflecting a trend related to the negative impacts on
some of our customer’s businesses due to the difficult external
environment.
If the
balance of the accounts receivable reserve increased or decreased by 20% at
December 31, 2009, pretax income would change by approximately
$2.3 million and earnings per share would change by approximately $0.03 per
diluted share based on the number of diluted shares outstanding at
December 31, 2009.
20
Inventory
Obsolescence
Product
inventories represent the largest asset on our balance sheet. Our goal is to
manage our inventory such that we minimize stock-outs to provide the highest
level of service to our customers. To do this, we maintain at each sales center
an adequate inventory of stock keeping units (SKUs) with the highest sales
volume. At the same time, we continuously strive to better manage our slower
moving classes of inventory, which are not as critical to our customers and
thus, inherently have lower velocity. Sales centers classify products into 13
classes based on sales at that location over the past 12 months. All inventory
is included in these classes, except for non-stock special order items and
products with less than 12 months of usage. The table below presents a
description of these inventory classes:
Class
0
|
new
products with less than 12 months usage
|
Classes
1-4
|
highest
sales value items, which represent approximately 80% of net sales at the
sales center
|
Classes
5-12
|
lower
sales value items, which we keep in stock to provide a high level of
customer service
|
Class
13
|
products
with no sales for the past 12 months at the local sales center level,
excluding special order
products not yet delivered to the customer
|
Null
class
|
non-stock
special order items
|
There is
little risk of obsolescence for products in classes 1-4 because products in
these classes generally turn quickly. We establish our reserve for inventory
obsolescence based on inventory classes 5-13, which we believe represent some
exposure to inventory obsolescence, with particular emphasis on SKUs with the
least sales over the previous 12 months. The reserve is intended to reflect
the value of inventory that we may not be able to sell at a profit. We provide a
reserve of 5% for inventory in classes 5-13 and non-stock inventory as
determined at the sales center level. We also provide an additional 5% reserve
for excess inventory in classes 5-12 and an additional 45% reserve for excess
inventory in class 13. We determine excess inventory, which is defined as the
amount of inventory on hand in excess of the previous 12 months usage, on a
company-wide basis. We also evaluate whether the calculated reserve
provides sufficient coverage of the total Class 13 inventory.
In
evaluating the adequacy of our reserve for inventory obsolescence, 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
sales center and Company levels;
|
·
|
changes
in customer preferences or regulatory
requirements;
|
·
|
seasonal
fluctuations in inventory levels;
|
·
|
geographic
location; and
|
·
|
new
product offerings.
|
We
periodically adjust our reserve for inventory obsolescence as changes occur in
the above-identified factors.
If the
balance of our inventory reserve increased or decreased by 20% at
December 31, 2009, pretax income would change by approximately
$1.6 million and earnings per share would change by approximately $0.02 per
diluted share based on the number of diluted shares outstanding at
December 31, 2009.
Vendor
Incentives
We
account for vendor incentives in accordance with Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) 605-50-25-10, Customer’s Accounting for Certain
Consideration Received from a Vendor. Many of our vendor arrangements
provide for us to receive incentives of specified amounts of consideration when
we achieve any of a number of measures. These measures are generally related to
the volume level of purchases from our vendors and may include negotiated
pricing arrangements. We account for vendor incentives as if they are a
reduction of the prices of the vendor’s products and therefore a reduction of
inventory until we sell the product, at which time such incentives are
recognized as a reduction of cost of sales in our income
statement.
21
Throughout
the year, we estimate the amount of the incentive earned based on our estimate
of cumulative purchases for the fiscal year relative to the purchase levels that
mark our progress toward earning the incentives. We accrue vendor incentives on
a monthly basis using these estimates provided that we determine they are
probable and reasonably estimable. Our estimates for cumulative purchases and
sales of qualifying products are driven by our sales projections, which can be
significantly impacted by a number of external factors including weather and
changes in economic conditions. Changes in our purchasing mix also impact our
incentive estimates, as incentive rates can vary depending on our volume of
purchases from specific vendors. We continually revise these estimates
throughout the year to reflect actual purchase levels and identifiable trends.
As a result, our estimated quarterly vendor incentive accruals may include
cumulative catch-up adjustments to reflect any changes in our estimates between
reporting periods.
If market
conditions were to change, vendors may change the terms of some or all of these
programs. Although such changes would not affect the amounts we have recorded
related to products already purchased, they may lower or raise our gross margins
for products purchased and sold in future periods.
Income
Taxes
We record
deferred tax assets or liabilities based on differences between the financial
reporting and tax basis of assets and liabilities using currently enacted rates
and laws that will be in effect when we expect the differences to reverse. Due
to changing tax laws and state income tax rates, significant judgment is
required to estimate the effective tax rate expected to apply to tax differences
that are expected to reverse in the future.
As of
December 31, 2009, and in accordance with the provisions of ASC 740, Income Taxes, United States
taxes were not provided on undistributed earnings of our foreign subsidiaries,
as we have invested or expect to invest the undistributed earnings indefinitely.
If in the future these earnings are repatriated to the United States, or if we
determine that the earnings will be remitted in the foreseeable future,
additional tax provisions may be required.
We hold,
through our wholly owned affiliates, cash balances in the countries in which we
operate, including 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
operations in 38 states and 7 foreign countries. The amount of income taxes we
pay is subject to adjustment by the applicable tax authorities. We are subject
to regular audits by federal, state and foreign tax authorities. Our estimate
for the potential outcome of any uncertain tax issue is highly judgmental. We
believe we have adequately provided for any reasonably foreseeable outcome
related to these matters. However, our future results may include favorable or
unfavorable adjustments to our estimated tax liabilities in the period the
assessments are made or resolved or when statutes of limitation on potential
assessments expire. These adjustments may include changes in valuation
allowances that we have established. As a result of these uncertainties, our
total income tax provision may fluctuate on a quarterly basis.
Incentive
Compensation Accrual
We have
an incentive compensation structure designed to attract, motivate and retain
employees. Our incentive compensation packages include bonus plans that are
specific to each group of eligible participants and their levels and areas of
responsibility. The majority of our bonus plans have annual cash payments that
are based primarily on objective performance criteria, with a component based on
management’s discretion. We calculate bonuses as a percentage of salaries based
on the achievement of certain key measurable financial and operational results,
including budgeted operating income and diluted earnings per share. We generally
make bonus payments at the end of February following the most recently completed
fiscal year.
Management
sets the objectives for our bonus plans at the beginning of the bonus plan year
using both historical information and forecasted results of operations for the
current plan year. The Compensation Committee of our Board approves these
objectives for certain bonus plans. We record an incentive compensation accrual
at the end of each month using management’s estimate of the total overall
incentives earned based on the amount of progress achieved towards the stated
bonus plan objectives. During the third and fourth quarters and as of our fiscal
year end, we adjust our estimated incentive compensation accrual based on our
detailed analysis of each bonus plan, the participants’ progress toward
achievement of their specific objectives and management’s estimates related to
the discretionary components of the bonus plans.
22
Our
estimated quarterly incentive compensation expense and accrual balances may vary
relative to actual annual bonus expense and payouts due to the
following:
·
|
the
discretionary components of the bonus
plans;
|
·
|
the
timing of the approval and payment of the annual bonuses;
and
|
·
|
our
projections related to achievement of multiple year performance objectives
for our Strategic Plan Incentive
Program.
|
Impairment
of Goodwill and Equity Method Investments
Goodwill
Our
largest intangible asset is goodwill. At December 31, 2009, our
goodwill balance was $176.9 million, representing 24% of total 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 ASC 350-20, Goodwill. Under these rules,
we test goodwill for impairment annually or on a more frequent basis if events
or changes in circumstances occur that indicate potential impairment. If the
estimated fair value of any of our reporting units has fallen below their
carrying value, we compare the estimated fair value of the reporting units’
goodwill to its carrying value. If the carrying value of a reporting units’
goodwill exceeds its estimated fair value, we recognize the difference as an
impairment loss in operating income. Since we define our operating
segment as an individual sales center and we do not have operations below the
sales center level, our reporting unit is an individual sales
center.
In
September 2009, we closed one of our Horizon sales centers in
Texas. As a result, we performed an interim impairment test to
determine the implied fair value of this reporting unit’s
goodwill. Since the implied fair value of goodwill was less than the
carrying value, we wrote off $0.3 million of goodwill related to this
reporting unit. This impairment expense is recorded in selling and
administrative expenses on the Consolidated Statements of Income.
In
October 2009, we performed our annual goodwill impairment test. As of
October 1, 2009, we had 203 reporting units with allocated goodwill
balances. The highest goodwill balance is $7.1 million for our
UK reporting unit. For the other reporting units, the highest
goodwill balance is $5.7 million and the average goodwill balance is
$0.8 million. We estimate the fair value of our reporting units
by utilizing a fair value model, which requires us to make several assumptions
about projected future cash flows, discount rates and multiples. In
order to determine the reasonableness of the assumptions included in our fair
value estimates, we compare the total estimated fair value for all aggregated
reporting units to our market capitalization on the date of our impairment
test. We also review for potential impairment indicators at the
reporting unit level based on an evaluation of recent historical operating
trends, current and projected local market conditions and other relevant factors
as appropriate. Based on our annual goodwill impairment test, we
determined that the goodwill attributed to all of our reporting units is not
impaired.
If our
assumptions or estimates in our fair value calculations change, we could incur
impairment charges in future periods which would decrease operating income and
result in lower asset values on our balance sheet. For example, we
performed a sensitivity test for the two key assumptions in our annual goodwill
impairment test and determined that an increase in our estimated weighted
average cost of capital of 50 basis points or a decrease in the estimated
perpetuity growth rate of 1% could have resulted in the estimated fair value of
four reporting units falling below their carrying values. The
calculated goodwill impairment based on this sensitivity test was approximately
$0.6 million combined for all four reporting units. Overall, we
believe that our reporting units most at risk for goodwill impairment include
the UK, Spain and one New Jersey location based on the combination of their
higher goodwill balances and 2009 operating results at approximately break even
levels due to the impacts of the current adverse external market
environment.
23
Equity
Method Investments
As of
December 31, 2009, we had two equity method investments, consisting of
our 38% investment in Latham Acquisition Corporation (LAC) and our 50%
investment in Northpark Corporate Center. We account for these
investments in accordance with ASC 323, Investments-Equity Method and Joint
Ventures.
We
evaluate our equity method investments for potential impairment indicators on an
ongoing basis. This evaluation requires the exercise of judgment
based upon the specific facts and circumstances of each investment. A
series of actual operating losses or projected future losses of an investee or
other factors may indicate a decrease in value of the investment. If
impairment indicators exist, we will evaluate whether the impairment is
other-than-temporary. Impairment is measured by comparing the
investment carrying amount to the estimated fair value of the
investment.
As of
December 31, 2008, the carrying value of our investments was
$31.2 million, including $30.1 million for LAC. Based on the
fact that LAC’s results had deteriorated due to external market conditions
(including a net loss in 2008) and our expectations for a continued difficult
environment in 2009, we considered other relevant facts and circumstances to
determine whether there was an indicator of a decrease in the value of our
investment as of December 31, 2008 and, if so, whether it reflected an
other-than-temporary impairment. In evaluating the value of our
investment in LAC, we considered the following:
·
|
the
challenging industry environment, which had a negative impact on LAC’s
2008 results;
|
·
|
expectations
for LAC’s near-term and long-term results based primarily on LAC’s market
position and financial projections (including projections used by LAC in
its annual impairment test, which determined that there was no impairment
of its goodwill and other intangible balances as of December 31,
2008);
|
·
|
the
anticipated timeframe for LAC’s return to profitability;
and
|
·
|
LAC’s
current financial condition, including its ability to meet working capital
needs.
|
Using the
criteria listed above, we determined that there was no impairment of our equity
method investments as of December 31, 2008.
In 2009,
LAC had a net loss for the six months ended June 2009 as its second quarter net
income was not enough to offset its first quarter seasonal loss. As
of June 30, 2009, we determined that there were no significant changes
in LAC’s long-term financial projections or the other factors we consider in
performing our evaluation for indicators of a potential decrease in the value of
our investments that may result in other-than-temporary
impairments.
In the
third quarter of 2009, LAC identified indicators of impairment based on an
evaluation of its future capital requirements that required it to perform an
interim impairment assessment of its goodwill and other intangible
assets. On September 1, 2009, LAC recorded a non-cash
impairment charge based on its interim impairment test. Since our pro
rata share of this impairment charge exceeded our equity investment balance, we
recognized a $26.5 million equity loss equal to our equity investment balance as
of September 1, 2009, reducing the value of our investment in LAC to
zero. In December 2009, LAC filed for bankruptcy and its Plan of
Reorganization was approved by the United States Bankruptcy Court for the
District of Delaware in January 2010, allowing it to emerge from
bankruptcy. As of January 2010, we no longer have an equity interest
in LAC and will not recognize any impact related to LAC’s future earnings or
losses.
Recent
Accounting Pronouncements
For
information about recent accounting pronouncements, see Note 1 of “Notes to
Consolidated Financial Statements,” included in Item 8 of this Form
10-K.
24
RESULTS
OF OPERATIONS
The table
below summarizes information derived from our Consolidated Statements of Income
expressed as a percentage of net sales for the past three fiscal
years:
Year
Ended December 31,
|
||||||||||
2009
|
2008
|
2007
|
||||||||
Net
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
Cost
of sales
|
70.8
|
71.1
|
72.5
|
|||||||
Gross profit |
29.2
|
28.9
|
27.5
|
|||||||
Operating
expenses
|
23.5
|
22.4
|
20.6
|
|||||||
Operating income |
5.7
|
6.4
|
6.9
|
|||||||
Interest
expense, net
|
0.6
|
1.1
|
1.1
|
|||||||
Income
before income taxes and equity earnings (loss)
|
5.1
|
5.4
|
5.8
|
Note:
|
Due
to rounding, percentages may not add to operating income or income before
income taxes and equity earnings
(loss).
|
Our
discussion of consolidated operating results includes the operating results from
acquisitions in 2009, 2008 and 2007. We have included the results of
operations in our consolidated results since the respective acquisition
dates.
Fiscal
Year 2009 compared to Fiscal Year 2008
The
following table breaks out our consolidated results into the base business
component and the excluded components (sales centers excluded from base
business):
(Unaudited)
|
Base
Business
|
Excluded
|
Total
|
|||||||||||
(In
thousands)
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
|||||||||||
December
31,
|
December
31,
|
December
31,
|
||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||
Net
sales
|
$
|
1,482,686
|
$
|
1,737,465
|
$
|
57,108
|
$
|
46,218
|
$
|
1,539,794
|
$
|
1,783,683
|
||
Gross
profit
|
434,264
|
501,019
|
15,460
|
14,209
|
449,724
|
515,228
|
||||||||
Gross
margin
|
29.3
|
%
|
28.8
|
%
|
27.1
|
%
|
30.7
|
%
|
29.2
|
%
|
28.9
|
%
|
||
Operating
expenses
|
345,591
|
385,280
|
15,693
|
14,472
|
361,284
|
399,752
|
||||||||
Expenses
as a % of net sales
|
23.3
|
%
|
22.2
|
%
|
27.5
|
%
|
31.3
|
%
|
23.5
|
%
|
22.4
|
%
|
||
Operating
income (loss)
|
88,673
|
115,739
|
(233
|
)
|
(263
|
)
|
88,440
|
115,476
|
||||||
Operating
margin
|
6.0
|
%
|
6.7
|
%
|
(0.4
|
)%
|
(0.6
|
)%
|
5.7
|
%
|
6.4
|
%
|
25
We have
excluded the following acquisitions from base business for the periods
identified:
Acquired
|
Acquisition
Date
|
Net
Sales
Centers Acquired
|
Period
Excluded
|
|||
General
Pool & Spa Supply (GPS) (1)
|
October
2009
|
7
|
October–December
2009
|
|||
Proplas
Plasticos, S.L. (Proplas)
|
November
2008
|
0
|
January–December
2009 and November–December
2008
|
|||
National
Pool Tile Group, Inc. (NPT) (2)
|
March
2008
|
8
|
January–May
2009 and March–May 2008
|
|||
Canswim
Pools
|
March
2008
|
1
|
January–May
2009 and March–May 2008
|
(1)
|
We acquired 10 GPS sales centers
and have consolidated 3 of these with existing sales centers as of
December 31, 2009.
|
(2)
|
We acquired 15 NPT sales centers
and have consolidated 7 of these with existing sales centers, including 4
in March 2008, 2 in the second quarter of 2008 and 1 in April
2009.
|
We
exclude the following sales centers from base business results for a period of
15 months (parenthetical numbers for each category indicate the number of sales
centers excluded as of December 31, 2009):
·
|
acquired
sales centers (7, net of consolidations – see table
above);
|
·
|
existing
sales centers consolidated with acquired sales centers
(1);
|
·
|
closed
sales centers (5, including 1 in
2009);
|
·
|
consolidated
sales centers in cases where we do not expect to maintain the majority of
the existing business (0); and
|
·
|
sales
centers opened in new markets (0).
|
Since we
divested our pool liner manufacturing operation in France at the beginning of
April 2008, we also excluded these operations from base business for the
comparative three month period ended March 31, 2008.
We
generally allocate corporate overhead expenses to excluded sales centers on the
basis of their net sales as a percentage of total net sales. After 15
months of operations, we include acquired, consolidated and new market sales
centers in the base business calculation including the comparative prior year
period.
The table
below summarizes the changes in our sales centers during 2009:
December
31, 2008
|
288
|
|
Acquired,
net of consolidations
|
7
|
|
Consolidated
|
(7
|
)
|
Closed
|
(1
|
)
|
December
31, 2009
|
287
|
For
information about our recent acquisitions, see Note 2 of “Notes to Consolidated
Financial Statements,” included in Item 8 of this Form 10-K.
Net
Sales
Year
Ended December 31,
|
|
||||||||||
(in
millions)
|
2009
|
2008
|
Change
|
||||||||
Net
sales
|
$
|
1,539.8
|
$
|
1,783.7
|
$
|
(243.9)
|
(14
|
)%
|
The new
pool and irrigation construction markets continue to face unprecedented adverse
conditions created by the combination of significant declines in the real estate
and the mortgage-backed financing markets. Coupled with the severely
depressed economic environment in 2009, these external factors have placed
considerable pressure on our top line results. As a result, our sales were
negatively impacted as construction activities remained depressed and consumers
continued to defer discretionary replacement purchases.
26
Base
business sales decreased 15% compared to 2008, including a 12% decline on the
swimming pool side of the business and a 37% decline on the irrigation side of
the business, which is more heavily weighted toward new construction and
discretionary product sales. Overall, weather conditions were
unfavorable compared to the same period in 2008 (see discussion of significant
weather impacts under the heading Seasonality and Quarterly
Fluctuations beginning on page 32). Unfavorable currency fluctuations
also resulted in a decrease in sales of approximately 1%.
The
overall decrease in net sales was partially offset by the
following:
·
|
estimated
inflationary price increases of approximately 3% to 4% that we passed
through the supply chain;
|
·
|
higher
sales of certain maintenance and repair products due to both price
inflation and market share growth, including a 6% increase in chemical
sales and a 2% increase in total parts product
sales;
|
·
|
a
net increase of approximately $13.0 million in sales for new drains
and related safety products as a result of the VGB Act, which became
effective in December 2008 and imposes mandatory federal
requirements on the manufacture, distribution and/or sale of suction
entrapment avoidance devices such as safety drain covers, public pool
drain covers and public pool drain systems (an increase of over
$17.0 million for the first nine months of 2009 was offset by a
decrease of over $4.0 million in the fourth quarter of 2009 compared
to the same period in 2008);
|
·
|
approximately
$7.0 million in first quarter sales related to our 2008 acquisitions;
and
|
·
|
$4.7
million in fourth quarter sales related to our 2009
acquisition.
|
Our sales
growth for MRR products was primarily due to the following:
·
|
the
continued successful execution of our sales, marketing and service
programs, which we believe have resulted in market share
gains;
|
·
|
higher
sales of non-discretionary products due to the increased installed base of
swimming pools, which we estimate grew approximately 1% in 2009;
and
|
·
|
price
increases (as mentioned above).
|
Gross
Profit
Year
Ended December 31,
|
|
||||||||||
(in
millions)
|
2009
|
2008
|
Change
|
||||||||
Gross
profit
|
$
|
449.7
|
$
|
515.2
|
$
|
(65.5)
|
(13
|
)%
|
|||
Gross
margin
|
29.2
|
%
|
28.9
|
%
|
In 2009,
gross margin increased 30 basis points compared to 2008 as a shift in sales mix
to products in the higher margin maintenance and repair market and specific
margin improvement initiatives helped offset the adverse impact on gross margins
due to the tough competitive pricing environment. Gross margin increased 60
basis points in the first half of 2009, but was flat in the second half of
2009. For the year, favorable impacts compared to 2008
included the following (listed in order of estimated magnitude):
·
|
benefits
recognized in the first half of 2009 resulting from pre-price increase
inventory purchases made in the second half of 2008 (with gross margin up
120 basis points in the first quarter of 2009 and up 30 basis points in
the second quarter of 2009 compared to the same periods in
2008);
|
·
|
increased
sales of preferred vendor and Pool Corporation private label products;
and
|
·
|
lower
freight expenses on product purchases due to lower fuel
costs.
|
27
Operating
Expenses
Year
Ended December 31,
|
|||||||||||
(in
millions)
|
2009
|
2008
|
Change
|
||||||||
Operating
expenses
|
$
|
361.3
|
$
|
399.8
|
$
|
(38.5)
|
(10
|
)%
|
|||
Operating
expenses as a percentage of net sales
|
23.5
|
%
|
22.4
|
%
|
The
decrease in operating expenses reflects a 10% decline in base business operating
expenses due primarily to the impact of our cost control initiatives including
lower payroll related, variable and discretionary expenses. Average
monthly total headcount in 2009 decreased 10% compared to 2008, driving a 9%
decline in total labor and related costs. Total delivery expenses
declined 25%, reflecting lower delivery volumes and decreases in both vehicle
operating expenses (including lower fuel costs) and vehicle rental
expenses. Most discretionary expenses declined compared to 2008,
including a $2.1 million decrease in advertising costs. Bad debt
expense also decreased $5.2 million as the rate of customer payment issues
has fallen after peaking at the end of the 2008 season.
The
decrease in base business operating expenses was partially offset by the impact
of our acquired sales centers. During the first quarter of 2009 we
realized approximately $2.0 million in operating expenses related to our
2008 acquisitions and we incurred $1.5 million of operating expenses in the
fourth quarter of 2009 related to our acquisition of GPS. Despite the
decrease in headcount, employee insurance costs increased $1.6 million
compared to 2008 due primarily to several high dollar claims in the fourth
quarter of 2009. Total operating expenses as a percentage of net
sales increased between periods due to the decrease in net sales.
Interest
Expense
Interest
expense, net declined $9.2 million compared to 2008 due primarily to a 41%
decrease in interest expense and $1.8 million of foreign currency
transaction gains. Interest expense declined due to a 17% lower
average outstanding debt balance and a decrease in the weighted average
effective interest rate to 3.4% in 2009 from 4.8% 2008.
Income
Taxes
The
decrease in income taxes is due to the decrease in income before income taxes
and equity earnings (loss). Our effective income tax rate was 39.30% at
December 31, 2009 and 39.26% at
December 31, 2008.
Net
Income and Earnings Per Share
Net
income decreased to $19.2 million in 2009 compared to $57.0 million in
2008. Earnings per share for 2009 decreased to $0.39 per diluted
share compared to $1.17 in 2008. The $0.78 decrease in diluted
earnings per share reflects the $0.54 per diluted share impact of LAC’s
impairment charge included in the reported equity loss for 2009. The
dilutive impact of our fourth quarter 2009 acquisition was approximately $0.01
per diluted share for 2009.
28
Fiscal
Year 2008 compared to Fiscal Year 2007
The
following table breaks out our consolidated results into the base business
component and the excluded components (sales centers excluded from base
business):
(Unaudited)
|
Base
Business
|
Excluded
|
Total
|
|||||||||||
(In
thousands)
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
|||||||||||
December
31,
|
December
31,
|
December
31,
|
||||||||||||
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
|||||||||
Net
sales
|
$
|
1,696,848
|
$
|
1,873,359
|
$
|
86,835
|
$
|
55,008
|
$
|
1,783,683
|
$
|
1,928,367
|
||
Gross
profit
|
488,502
|
517,157
|
26,726
|
13,489
|
515,228
|
530,646
|
||||||||
Gross
margin
|
28.8
|
%
|
27.6
|
%
|
30.8
|
%
|
24.5
|
%
|
28.9
|
%
|
27.5
|
%
|
||
Operating
expenses
|
370,658
|
382,230
|
29,094
|
14,642
|
399,752
|
396,872
|
||||||||
Expenses
as a % of net sales
|
21.8
|
%
|
20.4
|
%
|
33.5
|
%
|
26.6
|
%
|
22.4
|
%
|
20.6
|
%
|
||
Operating
income (loss)
|
117,844
|
134,927
|
(2,368
|
)
|
(1,153
|
)
|
115,476
|
133,774
|
||||||
Operating
margin
|
6.9
|
%
|
7.2
|
%
|
(2.7
|
)%
|
(2.1
|
)%
|
6.4
|
%
|
6.9
|
%
|
For an
explanation of how we calculate base business, please refer to the discussion of
base business on page 27 under the heading “Fiscal Year 2009 compared to Fiscal
Year 2008”.
For
purposes of comparing operating results for the year ended
December 31, 2008 to the year ended December 31, 2007, we
have excluded acquired sales centers from base business for the periods
identified in the table below. As of December 31, 2008, we
also excluded seven existing sales centers consolidated with acquired sales
centers, four closed sales centers and one consolidated sales center from base
business. In addition to the 22 total sales centers excluded from
base business as of December 31, 2008, there were two sales centers opened
in new markets that were excluded from January to May 2008 before they
became base business sales centers in June 2008. Since we
divested our pool liner manufacturing operation in France in April 2008, we
also excluded these operations from base business for the comparative nine month
period ended December 31, 2007.
Acquired
|
Acquisition
Date
|
Net
Sales
Centers Acquired
|
Period
Excluded
|
|||
Proplas
Plasticos, S.L.
(1)
|
November
2008
|
0
|
November
and December 2008
|
|||
NPT
(2)
|
March
2008
|
9
|
March–December
2008
|
|||
Canswim
Pools
|
March
2008
|
1
|
March–December
2008
|
|||
Tor-Lyn,
Limited
|
February
2007
|
1
|
February
– April 2007 and January – April
2008
|
The table
below summarizes the changes in our sales centers during 2008:
December
31, 2007
|
281
|
|
Acquired,
net of consolidations (2)
|
10
|
|
New
locations
|
1
|
|
Consolidated
|
(2
|
) |
Closed
|
(2
|
) |
December
31, 2008
|
288
|
We
acquired a single location in Spain and consolidated it with our existing Madrid
sales center operations.
We
acquired 15 NPT sales centers and consolidated 6 of these with existing sales
centers in 2008, including 4 in March 2008 and 2 in the second quarter of
2008.
For
information about our 2008 and 2007 acquisitions, see Note 2 of “Notes to
Consolidated Financial Statements,” included in Item 8 of this Form
10-K.
29
Net
Sales
Year
Ended December 31,
|
|||||||||||
(in
millions)
|
2008
|
2007
|
Change
|
||||||||
Net
sales
|
$
|
1,783.7
|
$
|
1,928.4
|
$
|
144.7
|
(8)
|
%
|
During
2008, new pool and irrigation construction markets continued to face
unprecedented adverse conditions created by the combination of significant
declines in the real estate and mortgage-backed financing markets. As a
result, our 2008 sales were negatively impacted with a more profound effect on
pool and irrigation construction product sales. The decrease in net sales
was more pronounced in our seasonally slow fourth quarter, declining 14%
compared to the same period in 2007 as the economy worsened and consumers began
to defer more discretionary repair and replacement purchases.
Base
business sales decreased 9% compared to 2007, including an 8% decline on the
swimming pool side of the business and an 18% decrease on the irrigation side of
the business. This impact was more concentrated in markets that had
the greatest run-up in real estate values between 2000 and 2006, which includes
a number of our larger markets in Florida, Arizona and parts of
California. The decline in new pool construction negatively impacted
complementary product sales, which decreased 15% compared to 2007.
Overall, weather conditions were unfavorable compared to the same period in
2007.
The
overall decrease in net sales was partially offset by increases due to the
following:
·
|
approximately
$47.0 million in sales related to our 2008
acquisitions;
|
·
|
moderate
sales growth for MRR products, including a 5% increase in chemical
sales;
|
·
|
estimated
average price increases of 2% to 4% that we passed through the supply
chain;
|
·
|
higher
freight out income of $3.3 million due to the implementation of fuel
surcharges, which offset the increase in outbound freight costs;
and
|
·
|
2%
sales growth for our International operations due primarily to favorable
currency fluctuations.
|
Our sales
growth for MRR products was primarily due to the following:
·
|
the
continued successful execution of our sales, marketing and service
programs, which we believe have resulted in market share
gains;
|
·
|
higher
sales of non-discretionary products due to the increased installed base of
swimming pools, which we estimate grew approximately 2% to 3% in 2007;
and
|
·
|
price
increases (as mentioned above).
|
Gross
Profit
Year
Ended December 31,
|
|||||||||||
(in
millions)
|
2008
|
2007
|
Change
|
||||||||
Gross
profit
|
$
|
515.2
|
$
|
530.6
|
$
|
(15.4)
|
(3)
|
%
|
|||
Gross
margin
|
28.9
|
%
|
27.5
|
%
|
Despite
the tough competitive pricing environment, gross margin increased 140 basis
points compared to 2007. The increase in gross
margin is primarily attributable to our focus on pricing discipline at the sales
center level. Other favorable impacts compared to 2007 included the
following (listed in order of estimated magnitude):
·
|
increased
sales of preferred vendor and Pool Corporation private label
products;
|
·
|
greater
margin contribution from our acquisition of
NPT;
|
·
|
a
shift in sales mix to products in the higher margin maintenance
market;
|
·
|
benefits
to our fourth quarter gross margin resulting from pre-price increase
inventory purchases (increase of 130 to 150 basis points in the fourth
quarter and approximately 20 basis points for fiscal 2008);
and
|
·
|
a
favorable comparison to 2007, which was more negatively impacted by
competitive pricing due to other distributors selling off excess
inventories.
|
30
Operating
Expenses
Year
Ended December 31,
|
|||||||||||
(in
millions)
|
2008
|
2007
|
Change
|
||||||||
Operating
expenses
|
$
|
399.8
|
$
|
396.9
|
$
|
2.9
|
1
|
%
|
|||
Operating
expenses as a percentage of net sales
|
22.4
|
%
|
20.6
|
%
|
The
increase in operating expenses was due to approximately $14.5 million of
operating expenses related to our 2008 acquisitions, which was partially offset
by a 3% decrease in base business operating expenses compared to
2007. The impact of cost control initiatives offset higher building
rental expenses of $2.6 million (primarily for sales centers opened or
expanded during 2007), an increase in bad debt expense of $2.2 million, higher
product delivery costs and inflationary increases in wages and other
costs. Total operating expenses as a percentage of net sales
increased between periods due to the decrease in net sales.
Our cost
control initiatives include tighter management of discretionary costs, the
consolidation or closing of nine sales centers since November 2007 and selective
personnel reductions over the past year. Despite the 6% reduction in
headcount year over year (excluding acquisitions), we still reduced overtime and
temporary labor costs by $4.5 million. Compared to 2007, incentive
expenses declined $3.8 million and employee insurance costs also decreased
due primarily to lower claims expense.
Interest
Expense
Interest
expense, net decreased 15% between periods as the impact of a decrease in our
weighted average effective interest rate for the period more than offset our
higher average debt outstanding balance. Average debt outstanding was 3%
higher for the year ended 2008, reflecting our increased borrowings during the
first half of 2008 that funded our March 2008 acquisitions. The weighted
average effective interest rate decreased to 4.8% in 2008 from 6.0% in
2007.
Income
Taxes
The
decrease in income taxes is due to the decrease in income before income taxes
and equity earnings (loss). Our effective income tax rate was 39.26% at
December 31, 2008 and 38.66% at December 31, 2007. The
increase in the effective income tax rate reflects a valuation allowance
established for annual losses from certain foreign operations.
Net
Income and Earnings Per Share
Net
income decreased 18% to $57.0 million in 2008. Earnings per share for 2008
(as adjusted in 2009 for the adoption of ASC 260-10-45-61A) decreased to
$1.17 per diluted share compared to $1.37 in 2007. The dilutive
impact of our first quarter acquisitions was approximately $0.02 per diluted
share for 2008. In both periods, earnings per share benefited from
the reduction of our weighted average shares outstanding due to the impact of
our 2007 share repurchase activities. This included an accretive
impact of approximately $0.02 in 2008 and $0.01 in 2007.
31
Seasonality
and Quarterly Fluctuations
Our
business is highly seasonal. In general, sales and operating income are highest
during the second and third quarters, which represent the peak months of both
swimming pool use and installation and landscape installations and maintenance.
Sales are substantially lower during the first and fourth quarters, when we may
incur net losses. In 2009, approximately 67% of our net sales and over 100% of
our operating income were generated in the second and third quarters of the
year.
We
typically experience a build-up of product inventories and accounts payable
during the winter months in anticipation of the peak selling season.
Excluding borrowings to finance acquisitions and share repurchases, our peak
borrowing usually occurs during the second quarter, primarily because extended
payment terms offered by our suppliers typically are payable in April, May and
June, while our peak accounts receivable collections typically occur in June,
July and August. Our debt levels peaked a little earlier in 2009
based on early payments we made in the first six months of 2009 to take
advantage of pre-price increase inventory purchases and early payment discounts
offered by certain vendors.
The
following table presents certain unaudited quarterly data for 2009 and 2008. We
have included income statement and balance sheet data for the most recent eight
quarters to allow for a meaningful comparison of the seasonal fluctuations in
these amounts. In our opinion, this information reflects all normal and
recurring adjustments considered necessary for a fair presentation of this data.
Due to the seasonal nature of the swimming pool industry, the results of any one
or more quarters are not necessarily a good indication of results for an entire
fiscal year or of continuing trends.
(Unaudited)
|
QUARTER
|
||||||||||||||||
(in
thousands)
|
2009
|
2008
|
|||||||||||||||
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
||||||||||
Statement
of Income Data
|
|||||||||||||||||
Net
sales
|
$
|
276,626
|
$
|
602,082
|
$
|
430,054
|
$
|
231,032
|
$
|
338,215
|
$
|
692,972
|
$
|
493,530
|
$
|
258,966
|
|
Gross
profit
|
81,193
|
178,068
|
123,394
|
67,069
|
95,354
|
202,752
|
141,800
|
75,322
|
|||||||||
Operating
income (loss)
|
(3,646
|
)
|
81,720
|
32,142
|
(21,776
|
)
|
2,197
|
89,990
|
38,617
|
(15,328
|
)
|
||||||
Net
income (loss)
|
(6,236
|
)
|
48,366
|
(9,322
|
)
|
(13,606
|
)
|
(3,184
|
)
|
52,875
|
22,060
|
(14,795
|
)
|
||||
Net
sales as a % of annual net
|
|||||||||||||||||
sales
|
18
|
%
|
39
|
%
|
28
|
%
|
15
|
%
|
19
|
%
|
39
|
%
|
28
|
%
|
15
|
%
|
|
Gross
profit as a % of annual
|
|||||||||||||||||
gross
profit
|
18
|
%
|
40
|
%
|
27
|
%
|
15
|
%
|
19
|
%
|
39
|
%
|
28
|
%
|
15
|
%
|
|
Operating
income (loss) as a
|
|||||||||||||||||
%
of annual operating income
|
(4
|
)%
|
92
|
%
|
36
|
%
|
(25
|
)%
|
2
|
%
|
78
|
%
|
33
|
%
|
(13
|
)%
|
|
Balance
Sheet Data
|
|||||||||||||||||
Total
receivables, net
|
$
|
160,318
|
$
|
233,288
|
$
|
149,733
|
$
|
96,364
|
$
|
206,187
|
$
|
278,654
|
$
|
178,927
|
$
|
115,584
|
|
Product
inventories, net
|
397,863
|
325,198
|
318,177
|
355,528
|
476,758
|
385,258
|
345,944
|
405,914
|
|||||||||
Accounts
payable
|
201,300
|
194,004
|
137,761
|
178,391
|
333,104
|
193,663
|
128,329
|
173,688
|
|||||||||
Total
debt
|
381,221
|
334,015
|
273,300
|
248,700
|
396,110
|
441,992
|
337,742
|
327,792
|
Note: Due to rounding, the sum of quarterly percentage amounts may not equal 100%.
We expect
that our quarterly results of operations will continue to fluctuate depending on
the timing and amount of revenue contributed by new and acquired sales
centers. Based on our peak summer selling season, we generally open
new sales centers and close or consolidate sales centers, when warranted, either
in the first quarter before the peak selling season starts or in the fourth
quarter after the peak selling season ends.
32
Weather
is one of the principal external factors affecting our business. The table below
presents some of the possible effects resulting from various weather
conditions.
Weather
|
Possible
Effects
|
|
Hot
and dry
|
•
|
Increased
purchases of chemicals and supplies
|
for
existing swimming pools
|
||
•
|
Increased
purchases of above-ground pools and
|
|
irrigation
products
|
||
Unseasonably
cool weather or extraordinary
amounts of rain
|
•
|
Fewer
pool and landscape installations
|
•
|
Decreased
purchases of chemicals and supplies
|
|
•
|
Decreased
purchases of impulse items such as
|
|
above-ground
pools and accessories
|
||
Unseasonably
early warming trends in spring/late cooling trends in fall
|
•
|
A
longer pool and landscape season, thus increasing our
sales
|
(primarily
in the northern half of the US)
|
||
Unseasonably
late warming trends in spring/early cooling trends in fall
|
•
|
A
shorter pool and landscape season, thus decreasing our
sales
|
(primarily
in the northern half of the US)
|
While
weather conditions in the first quarter of 2009 were generally favorable
compared to the same period last year, we did not realize any positive impact on
sales given the overriding adverse economic environment. Unfavorable
weather delayed the start of the pool season in both 2008 and 2009 in a number
of our markets, with the 2009 season adversely impacted in most markets by much
colder than normal temperatures in April. Throughout the second
quarter of 2009, weather conditions were unfavorable overall and adversely
impacted sales due to cold and wet conditions in the Midwest and
Northeast. The Southwest also experienced unseasonably cool and wet
weather during June. Our third quarter 2009 sales were also
negatively impacted due to much colder than normal temperatures that shortened
the pool season in most Central and Northern markets and higher than normal
rainfall in the South Central United States. Consistent with the third
quarter of 2008, weather conditions were favorable in the Western U.S. and
Florida due to warmer than average temperatures. However, near record
precipitation across most of the Central and Southeast regions and much colder
than average temperatures in the western half of the United States negatively
impacted our fourth quarter sales.
In the
first half of 2008, our sales benefited from more favorable weather in Texas and
Oklahoma compared to the same period in 2007 (see discussion
below). However, our sales were negatively impacted in 2008 by
generally unfavorable weather conditions including cooler temperatures and
higher precipitation nationally compared to 2007. The start of the
2008 pool season was delayed even further than in 2007 due to several late
winter storms in the Midwest and Northeast and much cooler March temperatures
across most of the country. Cooler than normal temperatures in August
and September also shortened the pool season in 2008 for most North American
markets excluding the West Coast, while a number of severe tropical systems
adversely impacted our sales in Texas, Florida and Louisiana during the third
quarter of 2008.
In 2007,
our sales were negatively impacted by extended winter conditions that delayed
the start of the pool season in the Northeast compared to 2006, much cooler and
unusually wet weather conditions in Texas and Oklahoma during the first seven
months of 2007 (which had a significant impact on sales related to pool and
landscape construction) and less than ideal conditions in the third quarter,
which compared unfavorably to the same period in 2006.
33
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
is defined as the ability to generate adequate amounts of cash to meet
short-term and long-term cash needs. We assess our liquidity in terms of our
ability to generate cash to fund our operating activities, taking into
consideration the seasonal nature of our business. Significant factors which
could affect our liquidity include the following:
·
|
cash
flows generated from operating
activities;
|
·
|
the
adequacy of available bank lines of
credit;
|
·
|
acquisitions;
|
·
|
dividend
payments;
|
·
|
capital
expenditures;
|
·
|
the
timing and extent of share repurchases;
and
|
·
|
the
ability to attract long-term capital with satisfactory
terms.
|
Our
primary capital needs are seasonal working capital obligations and other general
corporate purposes, including acquisitions, dividend payments and share
repurchases. Our primary sources of working capital are cash from operations
supplemented by bank borrowings, which combined with seller financing have
historically been sufficient to support our growth and finance acquisitions. The
same principle applies to funds used for share repurchases and capital
expenditures.
We
prioritize our use of cash based on investing in our business, maintaining a
prudent debt structure and returning money to our shareholders. Our specific
priorities for the use of cash are as follows:
·
|
maintenance
and new sales center capital expenditures, which has averaged
approximately 0.5% to 0.75% of net sales historically but was below and at
the bottom of this range the past two years due to lower capacity
expansion;
|
·
|
strategic
acquisitions executed
opportunistically;
|
·
|
payment
of cash dividends as and when declared by the Board;
and
|
·
|
repayment
of debt.
|
While we
still have our Board authorized share repurchase program in place with
$53.0 million of the current authorized amount remaining available as of
December 31, 2009, this is not a current priority for the use of
cash.
Sources
and Uses of Cash
The
following table summarizes our cash flows (in thousands):
Year
Ended December 31,
|
||||||||||
2009
|
2008
|
2007
|
||||||||
Operating
activities
|
$
|
113,250
|
$
|
93,282
|
$
|
71,644
|
||||
Investing
activities
|
(18,105
|
)
|
(41,304
|
)
|
(12,638
|
)
|
||||
Financing
activities
|
(99,344
|
)
|
(44,726
|
)
|
(63,957
|
)
|
Cash
provided by operations increased $20.0 million to $113.3 million in 2009
compared to 2008. In January 2009, we paid $30.0 million
for our deferred third and fourth quarter 2008 federal income tax
payments. We also paid $26.0 million in 2009 for our third and
fourth quarter 2009 estimated taxes. Cash from operations improved
$76.0 million in 2009 excluding this $56.0 million combined impact of
timing differences related to our 2008 and 2009 estimated federal income tax
payments. This improvement is due to our focused management of
working capital and reflects the significant decrease in
inventory. The reduction of cash used in investing activities is due
to comparatively lower cash paid for acquisitions. Net payments on
long-term debt of $79.1 million exceeded last year’s net payments by
approximately $56.0 million, driving the increase in cash used in financing
activities.
Cash
provided by operations in 2008 increased $21.6 million compared to 2007 due
primarily to the favorable impact from the reduction in outstanding accounts
receivable. Our 2008 cash provided by operating activities also
reflects the benefit related to our $30.0 million deferred third and fourth
quarter 2008 estimated federal tax payments as allowed by the Internal Revenue
Service (IRS) for taxpayers affected by Hurricane Gustav. This
benefit was offset by a negative impact of approximately $36.0 million
related to the net purchase and payment of inventory we purchased ahead of
vendor price increases. In 2008, the increase in cash used in
investing activities reflects cash paid for our March 2008 acquisitions
partially offset by a decrease in capital expenditures. Cash used in
financing activities in 2008 includes $23.1 million of net payments on
debt.
34
Future
Sources and Uses of Cash
Our
unsecured syndicated senior credit facility (the Credit Facility) provides for
$300.0 million in borrowing capacity including a $240.0 million
five-year revolving credit facility (the Revolver) and a term loan (the Term
Loan) with an original principal amount of $60.0 million.
At
December 31, 2009, there was $100.7 million outstanding and
$138.5 million available for borrowing under the Revolver. The
Revolver matures on December 20, 2012. The weighted average
effective interest rate on the Revolver was approximately 1.9% for the year
ended December 31, 2009. In April 2009, we entered into an
interest rate swap agreement to reduce our future exposure to fluctuations in
interest rates on the Revolver. This swap agreement will convert the
Revolver’s variable interest rate to a fixed rate of 1.725% on a notional amount
of $50.0 million. The swap has an effective date of January 27,
2010 and will terminate on January 27, 2012.
At
December 31, 2009, there was $48.0 million outstanding under the Term
Loan. We have remaining principal payments on the Term Loan of
$12.0 million per quarter in 2010 and we intend to fund these payments by
using cash provided by operations and borrowings under our
Revolver. Our current interest rate swap agreement reduces our
exposure to fluctuations in interest rates for the remaining outstanding period
of the Term Loan by converting our variable rate to a fixed rate
basis. This swap will terminate when the Term Loan matures on
December 20, 2010. The weighted average effective interest
rate on the Term Loan was approximately 3.2% for the year ended December
31, 2009.
The
Credit Facility includes sublimits for the issuance of swingline loans and
standby letters of credit. Pursuant to an accordion feature, the
aggregate maximum principal amount of the commitments under the Revolver may be
increased at our request and with agreement by the lenders, by up to
$75.0 million, to a total of $315.0 million.
On
February 12, 2007, we issued and sold $100.0 million aggregate
principal amount of Floating Rate Senior Notes (the Notes) in a private
placement offering pursuant to a Note Purchase Agreement. The Notes are due
February 12, 2012 and accrue interest on the unpaid principal balance
at a floating rate equal to a spread of 0.600% over the three-month LIBOR, as
adjusted from time to time. In February 2007, we entered into an interest
rate swap agreement to reduce our exposure to fluctuations in interest rates on
the Notes. The swap agreement converts the Notes’ variable interest rate to a
fixed rate of 5.088% on the initial notional amount of $100.0 million,
which decreased to a notional amount of $50.0 million in February
2010. The effective interest rate on the Notes was approximately
5.688% for the year ended December 31, 2009.
Financial
covenants on our Credit Facility and Notes are closely aligned and include a
minimum fixed charge coverage ratio and maintenance of a maximum total leverage
ratio, which are our most restrictive financial covenants. As of
December 31, 2009, the calculations of these two covenants are
detailed below:
·
|
Maximum Average Total Leverage
Ratio. On the last day of each fiscal quarter, our average total
leverage ratio must be less than or equal to 3.25 to
1.00. Average Total Leverage Ratio is the ratio of the trailing
twelve months (TTM) Average Total Funded Indebtedness plus the TTM
Average Accounts Securitization Proceeds divided by the TTM EBITDA (as
those terms are defined in our amended Credit Facility). As of
December 31, 2009, our average total leverage ratio equaled 2.87
(compared to 2.77 as of December 31, 2008) and the TTM average
total debt amount used in this calculation was
$310.4 million.
|
·
|
Minimum Fixed Charge
Ratio. On the last day of each fiscal quarter, our fixed charge
ratio must be greater than 2.25 to 1.00. Fixed Charge Ratio is
the ratio of the TTM EBITDAR (as defined in our amended Credit Facility)
divided by TTM Interest Expense (as defined in our amended Credit
Facility) paid or payable in cash plus TTM Rental Expense (as defined in
our amended Credit Facility). As of
December 31, 2009, our fixed charge ratio equaled 2.42 (compared
to 2.52 as of December 31, 2008) and TTM Rental Expense was
$57.2 million.
|
35
The
Credit Facility limits the declaration and payment of dividends on our common
stock to no more than 50% of the preceding year’s Net Income (as defined in our
amended Credit Facility), provided no default or event of default has
occurred and the dividends are declared and paid in a manner consistent
with our past practice. Failure to comply with any of our financial
covenants, scheduled interest payments, scheduled principal repayments, or any
other terms of our amended credit facilities could result in penalty payments,
higher interest rates on our borrowings or the acceleration of the
maturities of our outstanding debt. As of
December 31, 2009, we were in compliance with all covenants and
financial ratio requirements.
On
February 26, 2010, we amended certain provisions in our Credit Facility to
increase the dividend limitation in 2010 from 50% to 55% of our 2009 Net
Income. We believe we will remain in compliance with all covenants
and financial ratio requirements throughout 2010. For additional
information regarding our debt arrangements, see Note 5 of “Notes to
Consolidated Financial Statements,” included in Item 8 of this Form
10-K.
We
believe we have adequate availability of capital to fund present operations and
the current capacity to finance any working capital needs that may
arise. We continually evaluate potential acquisitions and hold
discussions with acquisition candidates. If suitable acquisition opportunities
arise that would require financing, we believe that we have the ability to
finance any such transactions.
As of
February 22, 2010, $53.0 million of the current Board authorized amount
under our share repurchase program remained available. While share repurchases
are not a current priority, we may continue to repurchase shares on the open
market from time to time depending on market conditions. We may use cash flows
from operations to fund these purchases or we may incur additional
debt.
Contractual
Obligations
At
December 31, 2009 our contractual obligations for long-term debt and
operating leases were as follows (in thousands):
Payments
due by period
|
||||||||||||||
Less
than
|
More
than
|
|||||||||||||
Total
|
1
year
|
1-3
years
|
3-5
years
|
5
years
|
||||||||||
Long-term
debt
|
$
|
248,700
|
$
|
48,000
|
$
|
200,700
|
$
|
—
|
$
|
—
|
||||
Operating
leases
|
160,897
|
43,517
|
63,621
|
32,323
|
21,436
|
|||||||||
$
|
409,597
|
$
|
91,517
|
$
|
264,321
|
$
|
32,323
|
$
|
21,436
|
For
additional discussion related to our debt, see Note 5 of “Notes to Consolidated
Financial Statements,” included in Item 8 of this Form 10-K. The
table below contains estimated interest payments related to our long-term
debt obligations listed in the table above. Our estimates of
future interest payments are calculated based on the December 31, 2009
outstanding balances of each of our debt instruments and the related effective
interest rates for the year ended December 31, 2009. On our
Term Loan and our Notes, the variable rates are converted to fixed rates under
our existing swap agreements. To project the
estimated interest expense to coincide with the time periods used in the table
above, we have projected the estimated debt balances for future years based on
information currently available related to scheduled payments and maturities of
these debt instruments.
Estimated
payments due by period
|
||||||||||||||
Less
than
|
More
than
|
|||||||||||||
Total
|
1
year
|
1-3
years
|
3-5
years
|
5
years
|
||||||||||
Future
interest expense
|
$
|
23,584
|
$
|
10,037
|
$
|
13,547
|
$
|
—
|
$
|
—
|
36
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. However, we have entered into interest rate
swap agreements to reduce our exposure to fluctuations in interest
rates. For information about our debt arrangements and interest rate
swaps, see Note 5 of “Notes to Consolidated Financial Statements,” included in
Item 8 of this Form 10-K.
In 2009,
there was no interest rate risk related to our Term Loan and our Notes since the
outstanding balances were fully hedged by our interest rate swaps. If
the variable rates on our Revolver and our Receivables Facility increased 1.0%
from the rate at December 31, 2009 and we borrowed the maximum
available amounts under these arrangements during 2009, then our pretax income
would decrease by approximately $3.5 million and earnings per share would
decrease by $0.04 per diluted share (based on the number of weighed average
diluted shares outstanding at December 31, 2009). The
maximum amount available under the Revolver is $315.0 million assuming that we
exercised the $75.0 million accordion feature.
Failure
of our swap counterparties would result in the loss of any potential benefit to
us under our swap agreements. In this case, we would still be obligated to pay
the variable interest payments underlying our debt
agreements. Additionally, failure of our swap counterparties would
not eliminate our obligation to continue to make payments under our existing
swap agreements if we continue to be in a net pay position.
Currency
Risk
We have
wholly owned subsidiaries in Canada, the United Kingdom, France, Italy,
Portugal, Spain and Mexico. Based on the functional currencies for
these international subsidiaries as shown in the table below, changes in
exchange rates for these currencies may positively or negatively impact our
sales, operating expenses and earnings. Historically, we have not
hedged our currency exposure and fluctuations in exchange rates have not
materially affected our operating results. While our international operations
accounted for only 9.5% of total net sales in 2009, significantly higher
volatility in these exchange rates in both 2008 and 2009 had a greater impact on
our consolidated results. Despite the relative small size of our
international operations, our exposure to currency rate fluctuations could be
material in future years to the extent that either currency rate changes are
significant or that our international operations comprise a larger percentage of
our consolidated results.
Functional
Currencies
|
|
Canada
|
Canadian
Dollar
|
United
Kingdom
|
British
Pound
|
France
|
Euro
|
Italy
|
Euro
|
Portugal
|
Euro
|
Spain
|
Euro
|
Mexico
|
Peso
|
37
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Page
|
|
39
|
|
40
|
|
41
|
|
42
|
|
43
|
|
44
|
38
The Board
of Directors and Shareholders
Pool
Corporation
We have
audited the accompanying consolidated balance sheets of Pool Corporation as of
December 31, 2009 and 2008, and the related consolidated statements of income,
stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2009. 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 Pool
Corporation at December 31, 2009 and 2008, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Pool Corporation's internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 1, 2010 expressed an unqualified opinion
thereon.
/s/ Ernst & Young
LLP
New
Orleans, Louisiana
March 1,
2010
39
Consolidated
Statements of Income