QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30‚ 2003 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 _
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) YESX NO __
At July 24, 2003, there were 23,563,715 outstanding shares of the registrant’s common stock, $.001 par value per share.
SCP POOL CORPORATION
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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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.
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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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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 for the quarter was $34.4 million at June 30, 2003 and $28.8 million at June 30, 2002. For the six month period, comprehensive income was $36.0 million at June 30, 2003 and $31.1 million at June 30, 2002.
In the first quarter of 2003, we closed a new 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.
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 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 $1.0 million of goodwill in connection with the acquisition. We have included the results of Les Industries R.P.’s operations in the Consolidated Financial Statements since the acquisition date.
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You should read the following discussion in conjunction with Management’s Discussion and Analysis included in our 2002 Annual Report on Form 10-K.
We currently conduct operations through 192 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:
We calculate same store growth by excluding the following service centers from the calculation:
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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 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.
Net sales increased $67.8 million, or 19%, to $431.9 million in the three months ended June 30, 2003 from $364.1 million in the comparable 2002 period. Base business sales growth of 7% contributed $22.7 million to the increase, while acquired service centers and service centers consolidated with acquired locations accounted for the remaining increase. Same store sales increased 6% in the second quarter of 2003. The increase in base business and same store sales is primarily due to the following:
Gross profit increased $24.2 million, or 25%, to $120.9 million in the three months ended June 30, 2003 from $96.7 million in the comparable 2002 period. Base business gross profit growth of 9% contributed $8.3 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.
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Gross profit as a percentage of net sales (gross margin) increased 140 basis points to 28.0% in the second quarter of 2003 from 26.6% in the comparable 2002 period. The base business gross margin improved 60 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), including the consolidation of margins from the manufacturing business.
Operating expenses, consisting of selling and administrative expenses, increased $15.4 million, or 32%, to $63.7 million in the three months ended June 30, 2003 from $48.3 million in the comparable 2002 period. Operating expenses for our base business increased $6.6 million, or 15%, compared to the second quarter of 2002. As a percentage of net sales, operating expenses increased 140 basis points to 14.7% in the second quarter of 2003 compared to 13.3% in the second quarter of 2002, while base business operating expenses as a percentage of net sales increased 100 basis points to 14.1% from 13.1% in 2002. The increase in the base business 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 consolidation of the manufacturing portion of the business.
Interest expense of $1.5 million was unchanged between quarters. Although average debt outstanding was higher in the second quarter of 2003, the effective interest rate decreased to 2.8% in the second quarter of 2003 from 4.2% in the comparable 2002 period.
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Net sales increased $92.9 million, or 17%, to $628.3 million in the six months ended June 30, 2003 from $535.4 million in the comparable 2002 period. Base business sales growth of 6% contributed approximately $32.9 million to the increase, while acquired service centers and service centers consolidated with acquired locations accounted for the remaining increase. Same store sales also increased 6% in the first half of 2003. The increase in base business and same store sales is primarily due to the following:
Gross profit increased $33.2 million, or 24%, to $173.4 million in the six months ended June 30, 2003 from $140.2 million in the comparable 2002 period. Base business gross profit growth of 9% contributed $12.4 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 27.6% in the first half of 2003 from 26.2% in the comparable 2002 period. The base business gross margin improved 70 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, including the consolidation of margins from the acquired manufacturing business.
Operating expenses, consisting of selling and administrative expenses, increased $25.2 million, or 29%, to $112.7 million in the six months ended June 30, 2003 from $87.5 million in the comparable 2002 period. Operating expenses for our base business increased $10.4 million, or 13%, compared to the first six months of 2002. As a percentage of net sales, operating expenses increased 160 basis points to 17.9% in the first half of 2003 compared to 16.3% in the first half of 2002, while base business operating expenses as a percentage of net sales increased 90 basis points to 17.0% from 16.1% in 2002. The increase in the base business 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 consolidation of the manufacturing portion of the business.
Interest expense decreased slightly to $2.6 million in the first six months of 2003 from $2.7 million in the comparable 2002 period. Although average debt outstanding was higher in the first half of 2003, the effective interest rate decreased to 2.7% in the first six months of 2003 from 4.2% in the comparable 2002 period.
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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.
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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The following table presents certain unaudited quarterly data for the first and second 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.
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 six months ended June 30, 2003, we made net payments of $61.5 million on the Revolving Credit Facility. We also made a $2.1 million payment on a line of credit we acquired in connection with the Quebec Acquisition. At June 30, 2003, there was $63.6 million outstanding and $86.4 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 3.0% for the six month period ended June 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:
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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 June 30, 2003, we were in compliance with all covenants and financial ratio requirements.
In the first quarter of 2003, we closed a new 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 June 30, 2003, there was $90.0 million outstanding under the Receivables Facility at an average effective interest rate of approximately 1.9%.
Net cash provided by operating activities increased to $8.9 million for the six months ended June 30, 2003 compared to $8.4 million for the same period last year. The $4.9 million increase in net income was largely offset by changes in operating assets and liabilities.
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. 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.
Due to the seasonal nature of our business, accounts receivable increased $104.9 million to $175.0 million at June 30, 2003 from $70.1 million at December 31, 2002. Excluding the Fort Wayne accounts receivable of approximately $18.9 million, accounts receivable increased $11.5 million, or 8%, to $156.1 million at June 30, 2003 compared to $144.6 million at June 30, 2002. This increase from the second quarter of 2002 to the second quarter of 2003 is consistent with the increase in base business net sales between periods.
The allowance for doubtful accounts increased to $3.6 million at June 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 96% at June 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 to $3.6 million at June 30, 2003 from $3.3 million at June 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 decreased slightly to 96% at June 30, 2003 compared to 101% at June 30, 2002.
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Due to the seasonal nature of our business, product inventories increased $13.9 million, or 8%, to $197.6 million at June 30, 2003 from $183.7 million at December 31, 2002. Excluding the approximate $23.1 million Fort Wayne inventory, inventory increased $5.6 million, or 3%, to $174.5 million at June 30, 2003 compared to $168.9 million at June 30, 2002.
The inventory reserve increased to $4.0 million at June 30, 2003 compared to $3.1 million at December 31, 2002. Our estimated slowest moving class of inventory decreased 46% from December 31, 2002 to June 30, 2003. The inventory reserve increased slightly to $4.0 million at June 30, 2003 compared to $3.9 million at June 30, 2002. Our estimated slowest moving class of inventory decreased 47% from June 2002 to June 2003.
As part of our share repurchase program, in the first quarter of 2003, we purchased 128,200 shares of our common stock in the open market at an average price of $26.03 per share. In the second quarter of 2003, we canceled these shares.
On July 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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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 similiar 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 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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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 will be effective September 30, 2003 and terminate May 28, 2004.
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 June 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 our disclosure controls and procedures were effective as of June 30, 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 June 30, 2003.
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At the Annual Meeting of Stockholders held on May 6, 2003, 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 ratify the appointment of Ernst & Young LLP, certified public accountants, as our independent auditors for the fiscal year ending December 31, 2003.
Exhibits and Reports on Form 8-K
Exhibits required by Item 601 of Regulation S-K
Composite Certificate of Incorporation of the Company. (1)
Composite Bylaws of the Company. (2)
Form of certificate representing shares of common stock of the Company. (3)
Certification by Craig K. Hubbard pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by Manuel J. Perez de la Mesa pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302
by the Sarbanes-Oxley Act of 2002
Certification by Manuel J. Perez de la Mesa and Craig K. Hubbard pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K On April 24, 2003, we furnished a Form 8-K, Item 9, Regulation FD Disclosure, announcing our first quarter earnings results.
On May 6, 2003, we furnished a Form 8-K, Item 9, Regulation FD Disclosure, announcing the acquisition of Les Industries R.P., Inc., a Quebec-based swimming pool company.
On May 6, 2003, we furnished a Form 8-K, Item 9, Regulation FD Disclosure, announcing the voting results from the Annual Stockholder's Meeting .
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Items 1,2,3 and 5 are not applicable and have been omitted.
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Incorporated by reference to the respective exhibit to our Quarterly Report on Form 10-Q for the period ended June 30, 2001.
Incorporated by reference to the respective exhibit to our Quarterly Report on Form 10-Q for the period ended March 31, 2003.
Incorporated by reference to the respective exhibit to our Registration Statement No. 33-92738.
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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 July 30, 2003.
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