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 April 30, 2001, there were 17,088,964 outstanding shares of the Registrant's common stock, $.001 par value per share.
SCP POOL CORPORATION
Form 10-QFor the Quarter Ended March 31, 2001
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.
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The accompanying Notes are integral part of the Consolidated Financial Statements.
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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 three month period ended March 31, 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 estimated $48.0 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 Acquisition was accounted for using the purchase method of accounting, and $18.0 million of goodwill was 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 January 1, 2001, the Company’s effective income tax rate increased from 38.25% to 39.0% 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.
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Notes to Consolidated Financial Statements (Unaudited) (continued)
6. Adoption of Accounting Pronouncement
On January 1, 2001, the Company adopted Financial Accounting Standards Board Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities”. As the Company has no derivatives at the date of adoption, there is no financial statement impact.
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 161 service centers in 35 states, the United Kingdom and France.
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.
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Results of Operations (continued)
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.
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Net sales increased $34.4 million, or 28%, to $155.5 million in the three months ended March 31, 2001 from $121.1 million in the comparable 2000 period. Service centers acquired in the Superior Pool Products acquisition (the “Superior Acquisition”) in 2000 and the Hughes Acquisition in 2001 contributed $34.0 million to the increase. This increase was partially offset by a decline in same store sales of $3.2 million, or 3%, due to unfavorable weather throughout most of the continental United States, excluding Florida. The balance of the increase is attributable to sales from new service centers opened or acquired in the past 15 months.
Gross profit increased $9.4 million, or 32%, to $38.4 million in the three months ended March 31, 2001 from $29.0 million in the comparable 2000 period. Gross profit as a percentage of net sales increased 80 basis points to 24.7% for the three months ended March 31, 2001 from 23.9% in the comparable 2000 period. The increase was realized in all domestic regions during the first quarter of 2001 and is attributable to a continuing focus on pricing and purchasing disciplines.
Operating expenses consisting of selling and administrative expenses and goodwill amortization increased $8.8 million, or 33%, to $35.1 million in the three months ended March 31, 2001 from $26.3 million in the comparable 2000 period. Operating expenses as a percentage of net sales increased to 22.6% in the first quarter of 2001 compared to 21.7% in the comparable prior year quarter. The increase reflects salaries, occupancy expense and other costs primarily associated with newly acquired service centers.
Interest and other expenses increased $0.9 million to $1.6 million in the three months ended March 31, 2001 from $0.7 million in the comparable 2000 period. The increase is primarily due to a $0.8 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.
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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.
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 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.
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Seasonality and Quarterly Fluctuations (continued)
The following table sets forth certain unaudited quarterly data for the first quarter 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.
Net cash used in operating activities was $2.5 million for the three month period ended March 31, 2001 compared to $17.1 million in the same period last year. The decrease in the use of cash is a result of an increase in accounts payable between quarters and lower inventory purchases between quarters, primarily resulting from higher inventory purchases made in the fourth quarter of 2000.
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.
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Liquidity and Capital Resources (continued)
The Revolving Loan has a total borrowing capacity of $65.0 million. During the three months ended March 31, 2001, the Company received net proceeds of $48.3 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 March 31, 2001, the Company had $5.7 million available for borrowing under its Revolving Loan. During the three months ended March 31, 2001, the Company made required scheduled principal payments of $1.3 million on the Term Loan, which had a balance of $7.0 million at March 31, 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.
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
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Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
Statements contained in this report regarding future periods which are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, factors related to (i) the sensitivity of the swimming pool supply business to weather conditions; (ii) the intense competition and low barriers to entry in the swimming pool supply industry; (iii) the sensitivity of the swimming pool supply business to general economic conditions; (iv) the Company’s ability to identify appropriate acquisition candidates, complete acquisitions on satisfactory terms and successfully integrate acquired businesses; (v) the Company’s ability to obtain financing on satisfactory terms; (vi) the risk of fire, safety and casualty losses and related claims of liability inherent in the storage of chemicals sold by the Company; and (vii) the Company’s ability to remain in compliance with the numerous environmental, health and safety requirements to which it is subject. Such factors could affect the Company’s actual results and could cause results to differ materially from the Company’s expectations described above.
The Company’s stockholders should also be aware that while the Company does, at various times, communicate with securities analysts, it is against the Company’s policies to disclose to such analysts any material non-public information or other confidential information. Accordingly, the Company’s stockholders should not assume that the Company agrees with statements or reports issued by such analysts. To the extent such statements or reports contain projections, forecasts or opinions by such analysts about the Company, such reports are not the responsibility of the Company.
For additional information identifying other important factors which may affect the Company’s operations and markets and could cause actual results to vary materially from those anticipated in the forward-looking statements, see the Company’s Securities and Exchange Commission filings, including, but not limited to, the discussion included in the Business section of the Company’s Form 10-K.
Part II. Other Information
Items 1 - 5 are not applicable and have been omitted.
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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 May 2, 2001.
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