QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30‚ 2001 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NO.: 0-26640
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports)‚ and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_]
At July 31‚ 2001‚ there were 17‚119‚298 outstanding shares of the Registrant’s common stock‚ $.001 par value per share.
SCP POOL CORPORATION
Form 10-QFor the Quarter Ended June 30‚ 2001
INDEX
Part I. Financial InformationItem 1. Financial Statements
Note: The balance sheet at December 31‚ 2000 has been derived from the audited financial statements at that date. The accompanying Notes are an integral part of the Consolidated Financial Statements.
1.
The accompanying Notes are an integral part of the Consolidated Financial Statements.
2.
The accompanying Notes are integral part of the Consolidated Financial Statements.
3.
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared by SCP Pool Corporation (the “Company”) in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly‚ they do not include all of the information and footnotes required by GAAP for complete financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of management‚ the accompanying unaudited interim financial statements reflect all adjustments consisting of normal recurring adjustments considered necessary for a fair presentation of the results of the interim period.
Operating results for the six month period ended June 30‚ 2001 are not necessarily indicative of the results that may be expected for the year ending December 31‚ 2001. The financial information set forth herein should be read in conjunction with the Company’s Notes to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31‚ 2000 filed by the Company with the Securities and Exchange Commission.
2. Earnings Per Share
Basic net income per common share equals net income divided by the weighted average number of common shares outstanding during the period. Diluted net income per common share equals net income plus the after tax interest incurred on the Company’s convertible notes‚ divided by common shares outstanding after giving effect to shares assumed to be issued on conversion of those notes and dilutive options.
3. Acquisition
In January 2001‚ the Company completed the purchase of substantially all of the assets and the assumption of certain liabilities of the pool division of Hughes Supply‚ Inc. (“Hughes” or the “Hughes Acquisition”) which added 31 service centers to the Company’s distribution network in the eastern half of the United States. The approximate $46.0 million purchase price of the Hughes Acquisition was financed by borrowings under the Company’s revolving line of credit and a $25.0 million short-term seller’s note issued by Hughes (the “Hughes Note”). The Hughes Note is subject to adjustment based upon the final purchase price. The Hughes Acquisition was accounted for using the purchase method of accounting‚ and approximately $19.4 million of goodwill has been recorded in connection with this acquisition. The purchase price and its allocation are tentative and may be adjusted based on provisions of the purchase agreement and management’s evaluation of assets acquired and liabilities assumed.
4. Changes in Estimates
Effective May 2001‚ the Company’s effective income tax rate decreased from 39.0% to 38.5% as a result of changes in its state income tax mix.
5. Reclassifications
Certain amounts in the 2000 Consolidated Financial Statements have been reclassified to conform to the 2001 presentation.
4.
Notes to Consolidated Financial Statements (Unaudited) (continued)
6. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by Statements 137 and 138 in June 1999 and June 2000, respectively. These statements, which were required to be adopted for fiscal years beginning after June 15, 2000, require the Company to recognize derivatives on the balance sheet at fair value. The statements also established new accounting rules for hedging instruments, which depend on the nature of the hedge relationship.
At the date of adoption on January 1, 2001, the Company held no derivatives and thus there was no financial statement impact in the first quarter of 2001. However, in the second quarter of 2001, the Company entered into two interest rate swap agreements primarily to reduce the Company’s exposure to adverse fluctuations in interest rates. The execution of these agreements resulted in an immaterial impact on the Company’s consolidated results of operations and financial position at June 30, 2001.
In July 2001, the FASB issued SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies the criteria which must be met in order for certain acquired intangible assets to be recorded separately from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment annually or more frequently if circumstances indicate potential impairment. Furthermore, any goodwill or intangible asset determined to have an indefinite useful life that is acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with SFAS No. 142. Goodwill acquired in business combinations completed prior to July 1, 2001 will continue to be amortized through December 31, 2001.
The Company adopted SFAS No. 141 effective July 1, 2001, and SFAS No. 142 will be adopted effective January 1, 2002. Upon adoption of SFAS No. 142, the Company will be required to measure goodwill for impairment as part of the transition process. Any impairment resulting from this transition test will be recorded as a change in accounting principle. The Company is currently evaluating the potential impact of adoption on the Company’s consolidated financial statements.
7. Stock Split
In July 2001, the Board of Directors declared a three–for–two stock split of the Company’s common stock, which will be paid in the form of a stock dividend on September 7, 2001 to the stockholders of record at the close of business on August 15, 2001.
5.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with Management’s Discussion and Analysis included in the Company’s Annual Report on Form 10-K for the year ended December 31‚ 2000 filed by the Company with the Securities and Exchange Commission.
Results of Operations
The Company currently conducts operations through 165 service centers in the United States and Europe.
The following table shows‚ for the periods indicated‚ information derived from the Company’s Consolidated Statements of Income expressed as a percentage of net sales for such period.
The following discussion of consolidated operating results includes the results of operations from service centers acquired in 2001 and 2000. The acquisitions were accounted for using the purchase method of accounting and‚ accordingly‚ the results of operations have been included in the Company’s consolidated results beginning on the respective acquisition dates.
6.
Results of Operations (continued)
Three Months Ended June 30‚ 2001 Compared to Three Months Ended June 30‚ 2000
Net sales increased $76.8 million‚ or 30%‚ to $332.1 million in the three months ended June 30‚ 2001 from $255.3 million in the comparable 2000 period. Service centers acquired in the Superior Pool Products acquisition (the “Superior Acquisition”) in 2000 and the pool division of Hughes Supply‚ Inc. (“Hughes” or the “Hughes Acquisition”) in 2001 contributed $71.3 million to the increase. Same store sales increased approximately 1%‚ and the balance of the increase is attributable to sales from service centers opened‚ acquired or consolidated in the past 15 months.
Gross profit increased $23.8 million‚ or 37%‚ to $88.3 million in the three months ended June 30‚ 2001 from $64.5 million in the comparable 2000 period. Gross profit as a percentage of net sales increased 140 basis points to 26.6% for the three months ended June 30‚ 2001 from 25.2% in the comparable 2000 period. The increase was realized in all regions during the second quarter of 2001 and is attributable to a continuing focus on pricing and purchasing disciplines at the service center level.
Operating expenses consisting of selling and administrative expenses and goodwill amortization increased $14.5 million‚ or 46%‚ to $45.8 million in the three months ended June 30‚ 2001 from $31.3 million in the comparable 2000 period. Service centers acquired in the Superior and Hughes Acquisitions contributed $10.2 million to the increase. Operating expenses as a percentage of net sales increased to 13.8% in the second quarter of 2001 compared to 12.3% in the comparable prior year quarter‚ primarily due to the Superior and Hughes Acquisitions.
Operating income in the second quarter of 2001 increased $9.4 million to $42.5 million compared to $33.1 million for the same period in 2000. Service centers acquired in the Superior and Hughes Acquisitions contributed $6.9 million to the increase. Operating profit margin for the quarter increased on a same store basis by approximately 70 basis points‚ while overall operating margins decreased slightly to 12.8% from 13.0% for the same quarter last year.
Interest and other expenses increased slightly to $1.2 million in the three months ended June 30‚ 2001 from $1.1 million in the comparable 2000 period.
7.
Six Months Ended June 30‚ 2001 Compared to Six Months Ended June 30‚ 2000
Net sales increased $111.2 million‚ or 30%‚ to $487.6 million in the six months ended June 30‚ 2001 from $376.4 million in the comparable 2000 period. Service centers acquired in the Superior and Hughes Acquisitions contributed $105.3 million to the increase. The balance of this increase is attributable to service centers opened‚ acquired or consolidated in the past 15 months. Same store sales on a year to date basis were relatively unchanged.
Gross profit increased $33.3 million‚ or 36%‚ to $126.7 million in the six months ended June 30‚ 2001 from $93.4 million in the comparable 2000 period. Gross profit as a percentage of net sales increased 120 basis points to 26.0% for the six months ended June 30‚ 2001 from 24.8% in the comparable 2000 period. The increase was realized in all domestic regions during the six month period and is attributable to a continuing focus on pricing and purchasing disciplines at the service center level.
Operating expenses consisting of selling and administrative expenses and goodwill amortization increased $23.2 million‚ or 40%‚ to $80.8 million in the six months ended June 30‚ 2001 from $57.6 million in the comparable 2000 period. Operating expenses as a percentage of net sales increased to 16.6% compared to 15.3% in the comparable prior year period‚ primarily due to the Superior and Hughes Acquisitions.
Operating income increased $10.1 million‚ or 28%‚ to $45.9 million in the six months ended June 30‚ 2001 compared to $35.8 million in the same period in 2000. Service centers acquired in the Superior and Hughes Acquisitions contributed $7.7 million to the increase. Operating profit margin for the quarter increased on a same store basis by approximately 60 basis points‚ while overall operating margins decreased slightly to 9.4% from 9.5% for the same period in 2000.
Interest and other expenses increased $1.0 million to $2.8 million in the six months ended June 30‚ 2001 from $1.8 million in the comparable 2000 period. The increase is due to a $1.0 million increase in interest expense as a result of higher average debt levels between periods due to the Superior Acquisition in July 2000 and the Hughes Acquisition in January 2001.
Seasonality and Quarterly Fluctuations
The Company’s business is highly seasonal. Weather is the principal external factor affecting the Company’s business. Hot‚ dry weather can increase pool installations and the purchase of chemicals and supplies. Unseasonably cool weather or extraordinary amounts of rainfall during the peak selling season can decrease pool installations and the purchase of chemicals and supplies. In addition‚ unseasonably early or late warming trends can increase or decrease the length of the pool season and‚ consequently‚ the Company’s sales. In general‚ sales and 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 the Company may incur net losses.
8.
Seasonality and Quarterly Fluctuations (continued)
The Company experiences a build-up of product inventories and accounts payable during the first and second quarters of the year in anticipation of the peak selling season. The Company’s peak borrowing usually occurs during the second quarter‚ primarily because extended payment terms offered by the Company’s suppliers typically are payable in April‚ May and June‚ while the Company’s peak accounts receivable collections typically occur in June‚ July and August.
The Company expects that its quarterly results of operations will continue to fluctuate depending on the timing and amount of revenue contributed by new service centers and acquisitions. The Company attempts 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.
The following table sets forth certain unaudited quarterly data for the first and second quarters of 2001 and the four quarters of 2000‚ which‚ in the opinion of management‚ reflects all adjustments consisting of normal recurring adjustments considered necessary for a fair presentation of such data. Results of any one or more quarters are not necessarily indicative of results for an entire fiscal year or of continuing trends.
Liquidity and Capital Resources
Currently‚ the Company’s primary sources of working capital are cash flows from operations and borrowings under a Senior Loan Facility consisting of a term loan (the “Term Loan”) and a revolving line of credit (the “Revolving Loan”). Borrowings are used to fund seasonal working capital needs and for other general corporate purposes‚ including acquisitions. The Company’s borrowings under its Senior Loan Facility‚ together with cash flows from operations and seller financing‚ historically have been sufficient to support the Company’s growth and to finance acquisitions.
9.
Liquidity and Capital Resources (continued)
Net cash provided by operating activities was $2.0 million for the six months ended June 30‚ 2001 compared to net cash used in operating activities of $16.7 million for the same period last year. The decrease in the use of cash is primarily due to lower inventory purchases between quarters as a result of higher inventory purchases made in the fourth quarter of 2000 and the consolidation of certain inventories aquired in the Hughes Acquisition. This decrease was offset by an increase in accounts receivable and a decrease in accounts payable‚ net of the effects of acquisitions‚ between quarters.
The Hughes Note requires principal payments which are due in four installments beginning with a $1.0 million payment on August 1‚ 2001 followed by three payments of $8.0 million each due September 1‚ October 1 and November 1‚ 2001. The Hughes Note matures on November 1‚ 2001 and bears interest of 7% per annum payable monthly beginning March 1‚ 2001 through maturity. The assets acquired in the Hughes Acquisition are pledged as collateral for the Hughes Note. As of August 3‚ 2001‚ the Company has made $22.0 million in principal payments which the Company believes will substantially fulfill its obligation under the Hughes Note pending final adjustments to the purchase price.
The Revolving Loan has a total borrowing capacity of $65.0 million. During the six months ended June 30‚ 2001‚ the Company received net proceeds of $25.3 million from the Revolving Loan‚ of which $23.0 million was used in January 2001 to finance a portion of the Hughes Acquisition. As of June 30‚ 2001‚ the Company had $6.7 million available for borrowing under its Revolving Loan. During the six months ended June 30‚ 2001‚ the Company made required scheduled principal payments of $2.5 million on the Term Loan‚ which had a balance of $5.8 million at June 30‚ 2001.
Borrowings under the Senior Loan Facility may‚ at the Company’s option‚ bear interest at either (i) the agent bank’s corporate base rate or the federal funds rate plus 0.5%‚ whichever is higher‚ plus a margin ranging from 0.0% to 0.5% or (ii) LIBOR plus a margin ranging from 0.875% to 2.125%‚ in each case depending on the Company’s leverage ratio. Substantially all of the assets of the Company‚ including the capital stock of its wholly owned subsidiaries‚ secure the obligations under the Senior Loan Facility. The Senior Loan Facility has numerous restrictive covenants which require the Company to maintain minimum levels of interest coverage and fixed charge coverage and which also restrict the Company’s ability to pay dividends and make capital expenditures. The Senior Loan Facility matures on December 31‚ 2002.
The Company believes it has adequate availability of capital from operations and its borrowings under the Senior Loan Facility to fund present operations and anticipated growth‚ including expansion in its existing and targeted market areas. The Company continually evaluates potential acquisitions and has held discussions with a number of acquisition candidates. However‚ the Company currently has no binding agreement with respect to any acquisition candidates. Should suitable acquisition opportunities or working capital needs arise that would require additional financing‚ the Company believes that its financial position and earnings history provide a solid base for obtaining additional financing resources at competitive rates and terms. Additionally‚ the Company may issue common or preferred stock to third parties or to sellers of acquired businesses.
10.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
There have been no material changes from that reported in the Company’s Form 10-K for the year ended December 31‚ 2000.
Foreign Exchange Risk
Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
Statements contained in this Form 10-Q which are not historical facts are “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. Statements made in this Form 10-Q‚ including those relating to the expected fluctuation of the Company’s quarterly results of operations‚ the adequacy and availability of capital from operations and borrowings under the Senior Loan Facility‚ the fulfillment of the Company's obligation under the Hughes Note‚ and the Company’s ability to obtain additional financing‚ are forward-looking statements.
These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company’s historical experience and its present expectations or projections. These risks and uncertainties include‚ but are not limited to:
identify appropriate acquisition candidates‚complete acquisitions on satisfactory terms and successfully integrate acquired businesses
obtain financing on satisfactory terms
penetrate new markets
generate sufficient cash flows to support expansion plans and for general operating activities
maintain favorable supplier arrangements and relationships
remain in compliance with the numerous environmental‚ health and safety requirements to which it is subject.
The Company cautions that while forward-looking statements are made in good faith and are based upon reasonable assumptions‚ investors should not place undue reliance on these forward-looking statements‚ each of which speaks only as of the date the statement was made.
The Company undertakes no obligation to publicly update or revise any forward-looking statements‚ whether as a result of subsequent events‚ new information or otherwise.
11.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on May 9‚ 2001‚ the following proposals were adopted by the margins indicated:
To elect a Board of Directors to hold office until the next Annual Meeting of Stockholders and until their successors are elected and qualified.
To approve an amendment to the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of the Company’s Preferred Stock from 100‚000 to 1‚000‚000.
To ratify the appointment of Ernst & Young LLP‚ certified public accountants‚ as the Company’s independent auditors for the fiscal year ending December 31‚ 2001.
12.
Item 6. Exhibits and Reports on Form 8-K
Items 1‚ 2‚ 3 & 5 are not applicable and have been omitted.
13.
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 August 13‚ 2001.
14.