QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 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 April 30, 2002, there were 27,025,906 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, 2002
Financial Information
Financial Statements
Note: The balance sheet at December 31, 2001 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)
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 the Company’s latest Annual Report on Form 10-K. Except for the adoption of Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets and SFAS 144, Accounting for the Impairment of Long-Lived Assets, as discussed in Note 3 below, the accounting policies used in preparing these financial statements are the same as those described in our Annual Report.
Certain prior year amounts have been reclassified to conform to the current year presentation.
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.
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Notes to Consolidated Financial Statements (Unaudited) (continued)
New Accounting Standards
On January 1, 2002, we adopted SFAS 142, Goodwill and Other Intangible Assets. Under these new rules, goodwill is no longer amortized but will be tested for impairment annually or at any other time when impairment indicators exist. Intangible assets with finite lives continue to be amortized over their useful lives. We completed the transitional goodwill impairment test in the first quarter of 2002 and determined that goodwill is not impaired.
The following table presents net income and earnings per share for the first quarters of 2002 and 2001 in comparative format assuming no goodwill amortization in 2001:
On January 1, 2002, we adopted SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and Accounting Principles Board Opinion 30, Reporting on the Results of Operations for a Disposal of a Segment of a Business. The adoption of this Statement did not have a material impact on our financial position or operating results.
Comprehensive Income
Comprehensive income at March 31, 2002 and March 31, 2001 was $2.4 million and $0.4 million, respectively.
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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 Annual Report on Form 10-K for the year ended December 31, 2001.
Results of Operations
We currently conduct operations through 177 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.
The following discussion of consolidated operating results includes the operating results from service centers acquired in 2001. We accounted for the acquisitions using the purchase method of accounting and the operating results have been included in our consolidated results since the respective acquisition dates.
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Net sales increased $16.2 million, or 10%, to $171.4 million in the three months ended March 31, 2002 from $155.2 million in the comparable 2001 period. An 8% increase in same store sales contributed approximately $9.7 million to the increase, while service centers acquired in 2001 contributed $4.6 million. Sales at new service centers accounted for the remaining increase. The increase in same store sales is primarily due to the following:
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Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001 (continued)
Gross profit increased $5.4 million, or 14%, to $43.5 million in the three months ended March 31, 2002 from $38.1 million in the comparable 2001 period. Same store gross profit growth of 9% contributed $2.5 million to the increase. Service centers acquired in 2001 contributed $0.9 million, and new service centers contributed approximately $1.0 million to the increase. The increase in same store gross profit growth is primarily due to the 8% increase in same store sales.
Gross profit as a percentage of net sales (gross margin) increased 80 basis points to 25.4% in the first quarter of 2002 from 24.6% in the comparable 2001 period, despite the dilutive impact of newly opened service centers and service centers acquired in 2001. The improvement in gross margin is due to several factors including:
Operating expenses, consisting of selling and administrative expenses, increased $4.3 million, or 12%, to $39.2 million in the three months ended March 31, 2002 from $34.9 million in the comparable 2001 period. Service centers acquired in 2001 contributed $2.1 million to the increase and new service centers contributed $1.0 million. Operating expenses for our base business increased $1.2 million, or 5%, primarily due to the increase in sales in the first quarter of 2002 compared to the first quarter of 2001.
Operating expenses as a percentage of net sales increased 40 basis points to 22.9% in the first quarter of 2002 compared to 22.5% in the first quarter of 2001. Excluding goodwill amortization in 2001, operating expenses as a percentage of net sales increased 70 basis points to 22.9% in 2002 from 22.2% in 2001, primarily due to the dilutive impact of newly opened and acquired service centers.
In the first quarter of 2002, interest expense decreased $0.3 million to $1.2 million from $1.5 million in the first quarter of 2001. Although average debt outstanding was higher in the first quarter of 2002, the effective interest rate was approximately 240 basis points lower than last year, which is consistent with the overall decline in interest rates over the past year.
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Seasonality and Quarterly Fluctuations
Our business is highly seasonal, and weather is the principal external factor affecting our business. Hot, dry weather can increase the purchase of chemicals and supplies for existing swimming pools and stimulate increased purchases of above ground pools. 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 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, 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.
The following table presents certain unaudited quarterly data for the first quarter of 2002 and the four quarters of 2001. 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.
Our primary capital needs are seasonal working capital obligations and other general corporate purposes, including acquisitions. Our primary sources of working capital are cash from operations supplemented by bank borrowings under a credit agreement (the Credit Agreement) with a group of banks. Borrowings, together with cash from operations and seller financing, historically have been sufficient to support our growth and finance acquisitions.
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Liquidity and Capital Resources
The Credit Agreement, which matures on November 27, 2004, allows us to borrow up to $110.0 million under a revolving line of credit (the Revolving Credit Facility). The Credit Agreement also has an “accordion” feature that permits us to increase the Revolving Credit Facility to $150.0 million subject to bank participation.
During the three months ended March 31, 2002, we received net proceeds of $23.0 million from the Revolving Credit Facility. At March 31, 2002, there was $108.0 million outstanding and $1.0 million available for borrowing under the Revolving Credit Facility.
In the fourth quarter of 2001 and the first quarter of 2002, we made accelerated payments to several vendors for accelerated inventory purchases. These purchases allowed us to take advantage of purchase incentives offered by the manufacturers in an effort to reduce their inventory levels at the end of the year. Because we made these accelerated payments and our peak accounts receivable collections typically do not begin until the second quarter, we increased our borrowings under the Revolving Credit Facility and we also borrowed additional funds in the form of a short-term note. On March 31, 2002, there was $1.0 million outstanding under this note, which matures on July 11, 2002. On May 1, 2002, there was no debt outstanding under the note and $3.0 million available for borrowing.
Interest on borrowings under the Revolving Credit Facility may be paid at either (i) 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 (ii) the current Eurodollar Rate plus a margin ranging from 1.125% to 1.750%, in each case depending on our leverage ratio. 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 us to maintain a minimum net worth and fixed charge coverage and which also restrict our ability to pay dividends. As of March 31, 2002, we were in compliance with all covenants and financial ratio requirements. The effective interest rate of the Revolving Credit Facility was 4.2% at March 31, 2002.
Net cash used in operating activities was $19.3 million for the three months ended March 31, 2002 compared to $2.5 million for the same period last year. The increase in the use of cash is related to the accelerated inventory purchases we made in the fourth quarter of 2001. We paid for these purchases in the fourth quarter of 2001 and the first quarter of 2002, which allowed us to take advantage of prompt payment incentives in lieu of extended payment terms.
We believe we have adequate availability of capital to fund current 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 material acquisition candidate. If suitable acquisition opportunities or working capital needs arise that would require additional financing, we believe that our current 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 in connection with any such acquisition.
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Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
There have been no material changes from what we reported in our Form 10-K for the year ended December 31, 2001.
Foreign Exchange Risk
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 contain 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:
penetrate new markets
identify appropriate acquisition candidates, complete acquisitions on satisfactory terms and successfully integrate acquired businesses
obtain financing on satisfactory terms
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 we are subject
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.
We undertake no obligation to publicly update forward-looking statements, whether as a result of subsequent events, new information or otherwise.
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Other Information
Exhibits and Reports on Form 8-K
Exhibits required by Item 601 of Regulation S-K 3.1 Restated Certificate of Incorporation of the Company. (1)3.2 Restated Bylaws of the Company. (1)4.1 Form of certificate representing shares of common stock of the Company. (2)10.1 First Amendment to Credit Agreement, entered into as of January 10, 2002, between SCP Pool Corporation and Bank One, NA.
Reports on Form 8-K On February 11, 2002, the Company furnished a Form 8-K, Item 9, Regulation FD Disclosure, announcing the Company’s fourth quarter earnings results.
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 8, 2002.
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