Back to GetFilings.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON‚ D. C. 20549

FORM 10-Q

COMMISSION FILE NO.: 0-26640

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) YES X NO __

At April 24, 2003, there were 23,528,013 outstanding shares of the registrant’s common stock, $.001 par value per share.

SCP POOL CORPORATION

Form 10-Q
For the Quarter Ended March 31, 2003

SCP POOL CORPORATION

Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date.

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

1

SCP POOL CORPORATION

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

2

SCP POOL CORPORATION

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

3

SCP POOL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

SCP Pool Corporation (the Company, which may be referred to as we, us or our) prepared the consolidated financial statements following accounting principles generally accepted in the United States (GAAP) and the requirements of the Securities and Exchange Commission (SEC). As permitted under those rules, certain footnotes or other financial information normally required by GAAP have been condensed or omitted. The financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. The results for the interim periods are not necessarily indicative of the results to be expected for the full year.

You should also read the financial statements and notes included in our 2002 Annual Report on Form 10-K. The accounting policies used in preparing these financial statements are the same as those described in our Annual Report.

We calculate basic earnings per share (EPS) by dividing net income by the weighted average number of common shares outstanding. Diluted EPS includes the dilutive effects of stock options and convertible notes.

We account for our employee stock options under the intrinsic value method described by Accounting Principles Bulletin 25, Accounting for Stock Issued to Employees. Accordingly, we do not record compensation expense for options issued with an exercise price equal to the stock’s market price on the grant date. If we had accounted for our employee stock options using the fair value method described in Statement of Financial Accounting Standards 123, Accounting for Stock-Based Compensation, our net income and earnings per share would have been reduced to the pro-forma amounts below (in thousands, except per share data):

4

SCP POOL CORPORATION

Notes to Consolidated Financial Statements (Unaudited) (continued)

Comprehensive income consists of net income and other gains and losses affecting stockholders’ equity that, under GAAP, are excluded from net income. In our case, these consist of foreign currency translation gains and losses and unrealized gains and losses on cash flow hedges, net of related income tax effects.

Comprehensive income was $1.6 million at March 31, 2003 and $2.4 million at March 31, 2002.

In the first quarter of 2003, we closed a new accounts receivable securitization facility (the Receivables Facility) with a seasonal borrowing capacity up to $90.0 million. The Receivables Facility provides for the true sale of certain of our receivables as they are created to a wholly-owned, bankruptcy-remote subsidiary. This subsidiary sells an undivided security interest in the receivables to an unrelated commercial paper conduit. We account for the Receivables Facility on-balance sheet because we have maintained effective control of the receivables. Accordingly, the receivables and the related debt are included in the accompanying consolidated balance sheet.

You should read the following discussion in conjunction with Management’s Discussion and Analysis included in our 2002 Annual Report on Form 10-K.

Results of Operations

We currently conduct operations through 191 service centers in North America and Europe.

The following table presents information derived from the Consolidated Statements of Income expressed as a percentage of net sales.

5

SCP POOL CORPORATION

Results of Operations (continued)

Beginning in the fourth quarter of 2002, we began calculating our “base business” growth, which is consistent with measures used by other distributors. We believe the base business measure is useful to explain the period to period changes in our operating results. We calculate base business growth by excluding the following service centers from the calculation for 15 months:

• Service centers acquired within the past 15 months;
• Service centers consolidated with acquired service centers; and
• New service centers opened in new markets in the past 15 months.

We calculate same store growth by excluding the following service centers from the calculation for 15 months:

• New service centers opened within the past 15 months;
• Service centers acquired within the past 15 months;
• Service centers consolidated with acquired service centers; and
• Service centers that experience market disruption due to their location in the immediate market areas of those mentioned above.

The base business calculation differs slightly from the same store calculation because base business includes (i) new service centers opened in existing markets and (ii) service centers affected due to their location in the immediate market areas of newly opened or acquired locations. Additionally, we allocate overhead expenses to the base business by considering base business net sales as a percentage of total net sales.

The following discussion of consolidated operating results includes the operating results from the acquisition of Fort Wayne Pools, Inc. (Fort Wayne or the Fort Wayne Acquisition) which we completed in August 2002. We accounted for the Fort Wayne Acquisition using the purchase method of accounting and the operating results have been included in our consolidated results since the acquisition date.

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

6

SCP POOL CORPORATION

Results of Operations (continued)

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002 (continued)

Net sales increased $25.0 million, or 15%, to $196.4 million in the three months ended March 31, 2003 from $171.4 million in the comparable 2002 period. A 6% increase in base business sales contributed approximately $10.3 million to the increase, while service centers acquired in 2002 and service centers consolidated with acquired locations accounted for the remaining increase. Same store sales also increased 6% in the first quarter of 2003. The increase in base business and same store sales is primarily due to the following:

• a larger installed base of swimming pools resulting in increased sales of non-discretionary products; and
• the continued successful execution of our sales, marketing and service programs.

Gross profit increased $9.0 million, or 21%, to $52.5 million in the three months ended March 31, 2003 from $43.5 million in the comparable 2002 period. Base business gross profit growth of 10% contributed $4.2 million to the increase. Service centers acquired in 2002 and service centers consolidated with acquired locations accounted for the remaining increase. The increase in base business gross profit growth is primarily due to the increase in base business sales.

Gross profit as a percentage of net sales (gross margin) increased 130 basis points to 26.7% in the first quarter of 2003 from 25.4% in the comparable 2002 period. The base business gross margin improved 90 basis points to 26.2% in 2003 from 25.3% in 2002 primarily due to improved selling and purchasing practices and secondarily due to our reconciliation of vendor rebates in the first quarter. The remaining increase in gross margin is attributable to the Fort Wayne acquired business.

Operating expenses, consisting of selling and administrative expenses, increased $9.8 million, or 25%, to $49.0 million in the three months ended March 31, 2003 from $39.2 million in the comparable 2002 period. Operating expenses for our base business increased $4.5 million, or 12%, compared to the prior year period.

Operating expenses as a percentage of net sales increased 200 basis points to 24.9% in the first quarter of 2003 compared to 22.9% in the first quarter of 2002, while base business operating expenses as a percentage of net sales increased 120 basis points to 23.5% from 22.3% in 2002. The increase in the base business operating expenses as a percentage of net sales is primarily due to additional payroll, incentive compensation and other supporting expenses that increased at a rate faster than the increase in seasonal net sales in the first quarter of 2003.

Operating income decreased $0.8 million, or 19%, to $3.5 million in the first quarter of 2003 from $4.3 million in the first quarter of 2002 primarily due to the dilutive effect of Fort Wayne as a result of the accentuated seasonality of its network which is predominantly located in northern markets.

Interest expense decreased slightly to $1.1 million in the first quarter of 2003 from $1.2 million in the first quarter of 2002. Although average debt outstanding was higher in the first quarter of 2003, the effective interest rate decreased to 2.5% in the first quarter of 2003 from 4.2% in the comparable 2002 period.

7

SCP POOL CORPORATION

Seasonality and Quarterly Fluctuations

Our business is highly seasonal, and weather is the principal external factor affecting our business. The table below presents some of the possible effects resulting from various weather conditions.

In general, sales and operating income are highest during the second and third quarters, which represent the peak months of swimming pool use and installation. Sales are substantially lower during the first and fourth quarters when we may incur net losses.

We typically experience a build-up of product inventories and accounts payable during the winter months in anticipation of the peak selling season. Excluding borrowings to finance acquisitions and share repurchases, our peak borrowing usually occurs during the second quarter, primarily because extended payment terms offered by our suppliers typically are payable in April, May and June, while our peak accounts receivable collections typically occur in June, July and August.

We expect that our quarterly operating results will continue to fluctuate depending on the timing and amount of revenue contributed by new service centers and acquisitions. We attempt to open new service centers at the end of the fourth quarter or the first quarter of the subsequent year to take advantage of preseason sales programs and the following peak selling season.

8

SCP POOL CORPORATION

Seasonality and Quarterly Fluctuations (continued)

The following table presents certain unaudited quarterly data for the first quarter of 2003 and the four quarters of 2002. In our opinion, this information reflects all normal and recurring adjustments considered necessary for a fair presentation of this data. The results of any of these quarters are not necessarily a good indication of results for an entire fiscal year or of continuing trends.

Liquidity and Capital Resources

Our primary capital needs are seasonal working capital obligations and other general corporate purposes, including acquisitions and share repurchases. Our primary sources of working capital are cash from operations supplemented by bank borrowings. Borrowings, together with cash from operations and seller financing, historically have been sufficient to support our growth and finance acquisitions.

Our credit agreement, which matures on November 27, 2004, allows us to borrow up to $150.0 million under a revolving line of credit (the Revolving Credit Facility).

During the three months ended March 31, 2003, we made net payments of $9.5 million on the Revolving Credit Facility. At March 31, 2003, there was $115.7 million outstanding and $34.3 million available for borrowing under the Revolving Credit Facility, subject to borrowing base availability supported by product inventories and available trade accounts receivable.

The average effective interest rate of the Revolving Credit Facility was 2.5% for the three month period ended March 31, 2003. Interest on borrowings under the Revolving Credit Facility may be paid at either of the following rates, in each case depending on our leverage ratio:

1. the agent’s corporate base rate or the federal funds rate plus 0.5%, whichever is higher, plus a margin ranging from 0.125% to 0.375%; or
   
   
2. the current Eurodollar Rate plus a margin ranging from 1.125% to 1.750%.

Substantially all of our assets, including the capital stock of our wholly-owned subsidiaries, secure our obligations under the Revolving Credit Facility. The Revolving Credit Facility has numerous restrictive covenants, which require that we maintain a minimum net worth and fixed charge coverage and which also restrict our ability to pay dividends. As of March 31, 2003, we were in compliance with all covenants and financial ratio requirements.

9

SCP POOL CORPORATION

Liquidity and Capital Resources (continued)

In the first quarter of 2003, we closed a new accounts receivable securitization facility (the Receivables Facility) with a seasonal borrowing capacity up to $90.0 million. The Receivables Facility provides for the true sale of certain of our receivables as they are created to a wholly-owned, bankruptcy-remote subsidiary. This subsidiary sells an undivided security interest in the receivables to an unrelated commercial paper conduit. We account for the Receivables Facility on-balance sheet because we have maintained effective control of the receivables. Accordingly, the receivables and the related debt are included in the accompanying consolidated balance sheet. We employed this arrangement because it provides us with a lower cost form of financing. At March 31, 2003, there was $45.6 million outstanding under the Receivables Facility at an average effective interest rate of 1.9%.

Net cash used in operating activities was $33.3 million for the three months ended March 31, 2003 compared to $19.3 million for the same period last year. This $14.0 million increase is primarily due to the $12.6 million increase in accounts receivable between periods.

We believe we have adequate availability of capital to fund present operations and anticipated growth, including expansion in existing and targeted market areas. We continually evaluate potential acquisitions and we have held discussions with a number of acquisition candidates. However, we currently have no binding agreement with respect to any acquisition candidate. If suitable acquisition opportunities or working capital needs arise that would require additional financing, we believe that our financial position and earnings history provide a solid base for obtaining additional financing resources at competitive rates and terms. Additionally, we may issue common or preferred stock to raise funds.

Accounts Receivable and the Allowance for Doubtful Accounts

Due to the seasonal nature of our business, accounts receivable increased $52.5 million to $122.6 million at March 31, 2003 from $70.1 million at December 31, 2002. Excluding the approximate $12.8 million Fort Wayne accounts receivable, accounts receivable increased $10.0 million, or 10%, to $109.8 million at March 31, 2003 compared to $99.8 million at March 31, 2002. This increase from the first quarter of 2002 to the first quarter of 2003 is consistent with the increase in net sales between periods.

The allowance for doubtful accounts decreased to $3.0 million at March 31, 2003 from $3.3 million at December 31, 2002. The allowance as a percentage of the accounts receivable greater than 60 days past due increased to 55% at March 31, 2003 compared to 48% at December 31, 2002.

The allowance for doubtful accounts increased to $3.0 million at March 31, 2003 from $2.9 million at March 31, 2002, which is consistent with the increase in gross accounts receivable between periods. The allowance as a percentage of the accounts receivable greater than 60 days past due decreased slightly to 55% at March 31, 2003 compared to 58% at March 31, 2002.

10

SCP POOL CORPORATION

Liquidity and Capital Resources (continued)

Product Inventories and the Reserve for Shrink and Obsolescence

Due to the seasonal nature of our business, product inventories increased $52.8 million to $236.5 million at March 31, 2003 from $183.7 million at December 31, 2002. Excluding the approximate $29.5 million Fort Wayne inventory, inventory decreased $8.1 million, or 4%, to $207.0 million at March 31, 2003 compared to $215.1 million at March 31, 2002.

The inventory reserve increased to $3.2 million at March 31, 2003 compared to $3.1 million at December 31, 2002. Estimated slowest moving class 13 inventory decreased by 5% from December 31, 2002 to March 31, 2003. The inventory reserve decreased to $3.2 million at March 31, 2003 compared to $4.3 million at March 31, 2002. Estimated slowest moving class 13 inventory decreased by 25% from March 2002 to March 2003.

Share Repurchase Program

As part of our share repurchase program, in the first quarter of 2003, we repurchased 128,200 shares of our common stock in the open market at an average price of $26.03 per share. On April 30, 2003, $35.2 million remained available under the authorization of our Board of Directors for future share repurchases. We intend to continue to repurchase shares on the open market from time to time, depending on market conditions.

11

SCP POOL CORPORATION

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

Our disclosure and analysis in this report contains forward-looking information that involves risks and uncertainties. From time to time, we may also provide oral or written forward-looking statements in other materials we release to the public. Forward-looking statements give our current expectations or forecasts of possible future results or events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. We often use words such as “anticipate”, “estimate”, “expect”, “believe” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance.

Among the factors that could cause actual results to differ materially are the following:

• the sensitivity of the industry to weather conditions
• the intense competition and low barriers to entry in the industry
• the sensitivity of the industry to general economic and market conditions
• our ability to:

• the effectiveness of our advertising, marketing and promotional programs
• changes in laws and regulations, including changes in accounting standards and taxation requirements (including tax rate changes, new tax laws and revised tax law interpretations)
• the risk of fire, safety and casualty losses and related liability claims inherent in the storage of the chemicals that we sell

We cannot guarantee that any future event or result will be realized, although we believe we have been prudent in our plans and assumptions. Should additional risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from those anticipated. Investors should bear this in mind as they consider forward-looking statements.

12

SCP POOL CORPORATION

Interest Rate Risk

There have been no material changes from what we reported in our Form 10-K for the year ended December 31, 2002.

Foreign Exchange Risk

There have been no material changes from what we reported in our Form 10-K for the year ended December 31, 2002.

The term “disclosure controls and procedures” is defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 (the “Act”). The rules refer to the controls and other procedures designed to ensure that information required to be disclosed in reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified. As of March 31, 2003, Management, including the CEO and CFO, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, Management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of March 31, 2003.

We maintain a system of internal accounting controls that are designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our policies and procedures are followed. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to March 31, 2003.

13

SCP POOL CORPORATION

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

_________________

14

SCP POOL CORPORATION

Signature Page

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on April 30, 2003.

15

SCP POOL CORPORATION

Certifications

I, Manuel J. Perez de la Mesa, certify that:

16

SCP POOL CORPORATION

Certifications

I, Craig K. Hubbard, certify that:

17

SCP POOL CORPORATION

Index to Exhibits

_________________

18