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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 October 24, 2003, there were 35,412,776 outstanding shares of the registrant’s common stock, $.001 par value per share.

SCP POOL CORPORATION

Form 10-Q
For the Quarter Ended September 30, 2003

SCP POOL CORPORATION

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

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SCP POOL CORPORATION

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

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SCP POOL CORPORATION

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

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SCP POOL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

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.

2. Earnings Per Share

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.

Also, see Note 7 for a discussion of a stock split during the current quarter.

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Notes to Consolidated Financial Statements (Unaudited) (continued)

3. Stock-Based Compensation

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):

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Notes to Consolidated Financial Statements (Unaudited) (continued)

4. Comprehensive Income

Comprehensive income consists of net income and other gains and losses affecting stockholders’ equity that, under GAAP, are excluded from net income. In 2003 and 2002, these consisted 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 $18.4 million for the quarter ended September 30, 2003 and $14.6 million for the quarter ended September 30, 2002. Comprehensive income was $54.4 million for the nine month period ended September 30, 2003 and $45.7 million for the nine month period ended September 30, 2002.

5. Asset-Backed Financing

In the first quarter of 2003, we closed an accounts receivable securitization facility (the Receivables Facility) with a peak seasonal borrowing capacity of 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.

6. Recent Acquisitions

We completed three acquisitions in the first nine months of 2003. In May 2003, we acquired the capital stock of Les Industries R.P. Inc. (the Quebec Acquisition), a Quebec-based swimming pool company. In connection with the Quebec Acquisition, we recorded the cost of a non-compete agreement totaling $0.7 million, which we are amortizing using the straight-line method over the agreement’s six-year contractual life. We also recorded approximately $1.2 million of goodwill in connection with the acquisition.

In August 2003, we acquired Sud Ouest Filtration (the SOFI Acquisition), a distributor of swimming pool products operating one service center in Bordeaux, France. The SOFI Acquisition represents our fourth location in France and expanded our market presence to the southwest part of that country. We also acquired in August Mepasa Albercas, a swimming pool distributor in Cuernavaca, Mexico (the Mepasa Acquisition). The Cuernavaca service center is our first location in Latin America.

We have included the results of operations of the Quebec, SOFI and Mepasa Acquisitions in the Consolidated Financial Statements since the respective acquisition dates.

On October 1, 2003, we purchased substantially all of the assets of the distribution division of Litehouse Products, Inc. (Litehouse). This distribution division sells primarily in the Ohio, Pennsylvania and Michigan markets. This acquisition establishes a strong presence for us in northern Ohio and adjacent markets.

7. Stock Split

In August, our Board of Directors declared a three-for-two stock split of our common stock, which was paid in the form of a stock dividend on September 12, 2003 to the stockholders of record at the close of business on August 22, 2003. Accordingly, all share and per share data and the related capital amounts for all periods presented reflect the effects of this split.

8. Recent Accounting Standards

In the fourth quarter of 2003 we will adopt Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities. We do not expect the adoption of this standard to have a material impact on our operating results or financial condition.

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

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

There have been no significant changes in our critical accounting policies from those discussed in our 2002 Annual Report on Form 10-K.

Results of Operations

We currently conduct operations through 195 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.

Note: Due to rounding, percentages may not add to total income before taxes.

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:

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

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

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

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

Results of Operations (continued)

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.

At September 30, 2003, 170 service centers were included in the base business calculations. Of the excluded service centers, 11 were acquired within the last 15 months and 13 were existing service centers that were consolidated with acquired locations within the last 15 months. In addition to the 24 service centers excluded from the base business calculations, the same store calculations also excluded six new service centers open less than 15 months and ten locations affected by new service center openings in the immediate market areas within the last 15 months.

The effect of service center acquisitions and consolidations in the base business tables below includes the operations of the following:

• Fort Wayne Pools - January 2003 through September 2003 and August through September 2002
• Service centers consolidated with Fort Wayne locations - January 2003 through September 2003 and January 2002 through September 2002
• Capital Pools- January 2003 and January 2002
• Les Industries R.P., Inc. - May through September 2003
• Mepasa Albercas- August and September 2003
• Sud Ouest Filtration- August and September 2003

The following discussion of consolidated operating results includes the operating results from acquisitions in 2003 and 2002. We accounted for these acquisitions using the purchase method of accounting and the operating results have been included in our consolidated results since the respective acquisition dates.

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

Results of Operations (continued)

Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002

Net sales increased $48.8 million, or 17%, to $337.6 million in the three months ended September 30, 2003 from $288.8 million in the comparable 2002 period. Base business sales growth of 14% contributed $35.8 million to the increase, while acquired service centers and service centers consolidated with acquired locations accounted for the remaining increase. Same store sales increased 12% in the third 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;
• the continued successful execution of our sales, marketing and service programs; and
• an increase in complementary product sales.

Gross profit increased $17.1 million, or 23%, to $92.2 million in the three months ended September 30, 2003 from $75.1 million in the comparable 2002 period. Base business gross profit growth of 15% contributed $10.1 million to the increase while acquired service centers 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 27.3% in the third quarter of 2003 from 26.0% in the comparable 2002 period. The base business gross margin improved 20 basis points primarily due to improved selling and purchasing practices. The remaining increase in gross margin is attributable to the business acquired in our August 2002 Fort Wayne acquisition (Fort Wayne or the Fort Wayne Acquisition) and inclusion of margins from the manufacturing business.

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

Results of Operations (continued)

Operating expenses, consisting of selling and administrative expenses, increased $10.3 million, or 20%, to $60.9 million in the three months ended September 30, 2003 from $50.6 million in the comparable 2002 period. Operating expenses for our base business increased $5.4 million, or 12%, compared to the third quarter of 2002. As a percentage of net sales, operating expenses increased 50 basis points to 18.0% in the third quarter of 2003 compared to 17.5% in the third quarter of 2002 primarily due to the Fort Wayne Acquisition. Operating expenses related to Fort Wayne are typically higher due to the inclusion of the manufacturing portion of the business. Base business operating expenses as a percentage of net sales decreased 20 basis points to 17.1% from 17.3% in 2002.

In the third quarter of 2003, interest expense decreased slightly to $1.1 million from $1.2 million in the third quarter of 2002. Average debt outstanding decreased $3.8 million from September 30, 2002 to September 30, 2003, and the effective interest rate decreased to 2.3% in the third quarter of 2003 from 3.7% in the comparable 2002 period.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

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

Results of Operations (continued)

Net sales increased $141.7 million, or 17%, to $965.9 million in the nine months ended September 30, 2003 from $824.2 million in the comparable 2002 period. Base business sales growth of 10% contributed approximately $76.0 million to the increase, while acquired service centers and service centers consolidated with acquired locations accounted for the remaining increase. Same store sales increased 8% in the first nine months 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;
• the continued successful execution of our sales, marketing and service programs; and
• an increase in complementary product sales.

Gross profit increased $50.2 million, or 23%, to $265.5 million in the nine months ended September 30, 2003 from $215.3 million in the comparable 2002 period. Base business gross profit growth of 11% contributed $22.8 million to the increase while acquired service centers 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 140 basis points to 27.5% in the first nine months of 2003 from 26.1% in the comparable 2002 period. The base business gross margin improved 40 basis points primarily due to improved selling and purchasing practices. The remaining increase in gross margin is attributable to the business acquired from the Fort Wayne Acquisition and inclusion of margins from the acquired manufacturing business.

Operating expenses, consisting of selling and administrative expenses, increased $35.5 million, or 26%, to $173.6 million in the nine months ended September 30, 2003 from $138.1 million in the comparable 2002 period. Operating expenses for our base business increased $16.2 million, or 13%, compared to the first nine months of 2002. As a percentage of net sales, operating expenses increased 120 basis points to 18.0% in the first nine months of 2003 compared to 16.8% in the comparable period last year, while base business operating expenses as a percentage of net sales increased 40 basis points to 17.0% from 16.6% in 2002. The increase in operating expenses as a percentage of net sales is primarily due to increased payroll expense resulting from new branches and the additional investment in support personnel and marketing programs to enhance our infrastructure and increase value to our customers and suppliers. Operating expenses related to the Fort Wayne Acquisition are typically higher due to the inclusion of the manufacturing portion of the business.

Interest expense decreased slightly to $3.7 million in the first nine months of 2003 from $3.9 million in the comparable 2002 period. Although average debt outstanding was higher in the first nine months of 2003, the effective interest rate decreased to 2.6% in the first nine months of 2003 from 4.0% in the comparable 2002 period.

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

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.

For example, in the first half of 2003 the eastern United States experienced significantly higher rainfall, which adversely impacted new pool construction. Extended cool and mild temperatures in the northern half of the United States delayed the use of pools and adversely impacted the sale of swimming pool maintenance and supply items. These adverse weather conditions were partially mitigated by the warm and dry weather in the western portion of the country. Reasonable weather in the late summer months provided for solid sales growth in the third quarter of 2003.

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.

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

Seasonality and Quarterly Fluctuations (continued)

The following table presents certain unaudited quarterly data for the first, second and third quarters 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. Due to the seasonal nature of our business, 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. In the past, borrowings and cash from operations have been sufficient to support our growth and finance acquisitions.

Our credit agreement, which matures on November 27, 2004, provides us with a peak seasonal borrowing capacity of up to $150.0 million under a revolving line of credit (the Revolving Credit Facility).

During the nine months ended September 30, 2003, we made net payments of $85.2 million on the Revolving Credit Facility. We also made a $2.1 million payment to pay off an outstanding line of credit we acquired in connection with the Quebec Acquisition. At September 30, 2003, there was $40.0 million outstanding and $110.0 million available for borrowing under the Revolving Credit Facility, subject to borrowing base availability supported primarily by product inventories and to a lesser extent by available trade accounts receivable.

The average effective interest rate of the Revolving Credit Facility was approximately 3.1% for the nine month period ended September 30, 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%.

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

Liquidity and Capital Resources (continued)

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 September 30, 2003, we were in compliance with all covenants and financial ratio requirements.

In the first quarter of 2003, we closed an accounts receivable securitization facility (the Receivables Facility) with a peak seasonal borrowing capacity of 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 September 30, 2003, there was $62.3 million outstanding under the Receivables Facility at an average effective interest rate of approximately 1.8%.

Net cash provided by operating activities increased $18.5 million, or 45%, to $59.5 million for the nine months ended September 30, 2003 compared to $41.0 million for the same period last year. This increase is primarily due to the increase in net income and improvements in working capital management.

We believe we have adequate availability of capital to fund present operations and anticipated growth, including expansion in existing and targeted market areas. We continually evaluate potential acquisitions and hold discussions with acquisition candidates. If suitable acquisition opportunities or working capital needs arise that would require additional financing, we believe that our financial position and earnings history provide a solid base for obtaining additional financing resources at competitive rates and terms. Additionally, we may issue common or preferred stock to raise funds.

Accounts Receivable and the Allowance for Doubtful Accounts

Due to the seasonal nature of our business, accounts receivable increased $47.8 million to $117.9 million at September 30, 2003 from $70.1 million at December 31, 2002. Accounts receivable increased $4.3 million to $117.9 million at September 30, 2003 from $113.6 million at September 30, 2002. This increase from the third quarter of 2002 to the third quarter of 2003 is consistent with the increase in net sales between periods.

The allowance for doubtful accounts increased to $4.3 million at September 30, 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 79% at September 30, 2003 compared to 48% at December 31, 2002. Our allowance typically increases throughout the year because we accrue for doubtful accounts as a percentage of net sales. The majority of write-offs typically occur in the fourth quarter when the pool season has ended.

The allowance for doubtful accounts increased slightly to $4.3 million at September 30, 2003 from $4.2 million at September 30, 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 increased to 79% at September 30, 2003 compared to 76% at September 30, 2002.

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

Liquidity and Capital Resources (continued)

Product Inventories and the Reserve for Shrink and Obsolescence

Due to the seasonal nature of our business, product inventories decreased $42.0 million, or 23%, to $141.7 million at September 30, 2003 from $183.7 million at December 31, 2002. Product inventories increased $3.2 million to $141.7 million at September 30, 2003 from $138.5 million at September 30, 2002, which is consistent with the increase in net sales between periods.

The inventory reserve increased to $4.5 million at September 30, 2003 compared to $3.1 million at December 31, 2002. Our estimated slowest moving class of inventory decreased approximately $0.3 million from December 31, 2002 to September 30, 2003. Our inventory reserve typically increases throughout the year as we accrue for inventory shrink. The shrink reserve is then adjusted after the physical inventory count in the fourth quarter.

The inventory reserve increased to $4.5 million at September 30, 2003 compared to $4.1 million at September 30, 2002. Our estimated slowest moving class of inventory increased approximately $0.5 million from September 2002 to September 2003.

Share Repurchase Program

As part of our share repurchase program, in the first quarter of 2003, we purchased 192,300 shares of our common stock in the open market at an average price of $17.35 per share. In the second quarter of 2003, we canceled these shares.

On October 24, 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.

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

Our disclosure and analysis in this report contains forward-looking information that involves risks and uncertainties. Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of future performance, statements of management’s plans and objectives, future contracts, and forecasts of trends and other matters. You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as “anticipate”, “estimate”, “expect”, “believe,” “will likely result,” “outlook,” “project” and other words and expressions of similar meaning. No assurance can be given that the results in any forward-looking statements will be achieved and actual results could be affected by one or more factors, which could cause them to differ materially. For these statements we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.

Certain factors that may affect our business and could cause actual results to differ materially from those expressed in any forward-looking statements include the following:

• the seasonality of our business and the sensitivity of the industry to weather conditions
• intense competition and low barriers to entry in the industry
• 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)
• changes in environmental, health and safety regulations and our ability to comply with such regulations
• the risk of fire, safety and casualty losses and related liability claims inherent in the storage of the chemicals that we sell
• acts of war or terrorist incidents
• changes in public and consumer taste
• future litigation or governmental proceedings
• labor disputes

The foregoing factors are not exhaustive and new factors may emerge which impact our business. It is impossible for us to predict all such factors. Therefore, forward-looking statements should not be relied upon as a prediction of actual future results. 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.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

As reported in our Form 10-K for the year ended December 31, 2002, our earnings continue to be exposed to changes in short-term interest rates because of the variable interest rates on our long-term debt.  In order to mitigate our risk in the future, in May 2003 we entered into an interest rate swap agreement with a variable notional amount.  The swap became effective September 30, 2003 and will terminate on May 28, 2004.

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.

Item 4.   Controls and Procedures

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Act). The rules refer to the controls and other procedures designed to ensure that information required to be disclosed in reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified. As of September 30, 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 as of September 30, 2003 our disclosure controls and procedures were effective at ensuring that material information related to us or our consolidated subsidiaries is made known to them and is disclosed on a timely basis in our reports filed under the Act.

We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Based on the most recent evaluation, we have concluded that no significant changes in our internal control over financial reporting occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

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

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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 October 30, 2003.

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Index to Exhibits

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