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| POOL > SEC Filings for POOL > Form 10-Q on 30-Oct-2009 | All Recent SEC Filings |
30-Oct-2009
Quarterly Report
You should read the following discussion in conjunction with Management's Discussion and Analysis included in our 2008 Annual Report on Form 10-K. For a discussion of our base business calculations, see page 11 under the RESULTS OF OPERATIONS section.
OVERVIEW
Financial Results
As the 2009 swimming pool season comes to a close, we are pleased with our results in this very challenging environment and are encouraged by more evidence that the adverse economic factors impacting our industry are beginning to subside. Specifically, the overall rate of sales decline is moderating and our sales in some leading markets such as Florida are up quarter over quarter. We have also made further progress on our gross margin, expense, and working capital management initiatives, resulting in strong cash flow generation.
Net sales decreased 13% compared to the third quarter of 2008 due primarily to the continued impact of lower pool and irrigation construction activity and deferred discretionary replacement activity. Unfavorable weather in the Central and Northern U.S. markets also negatively impacted our third quarter 2009 sales. These reductions were partially offset by an increase in certain maintenance and repair product sales.
Gross profit as a percentage of net sales (gross margin) remained flat at 28.7% for the third quarter of 2009 as favorable shifts in product mix and continued improvements in margin management practices helped offset negative pressures from the fiercely competitive pricing environment.
Selling and administrative expenses (operating expenses) decreased 12% in the third quarter of 2009 compared to the same period in 2008. This decrease reflects the impact of cost control initiatives, including lower payroll related, variable and discretionary expenses, and reduced delivery costs.
Operating income declined 17% compared to the third quarter of 2008, while operating income as a percentage of net sales (operating margin) decreased 30 basis points to 7.5% for the current quarter. Average debt levels decreased by $103.3 million quarter over quarter, driving a 45% reduction in interest expense.
We own a 38% equity interest investment in Latham Acquisition Corporation (LAC). In the third quarter of 2009, our total equity loss of $27.3 million included $0.8 million related to our share of LAC's net loss from ongoing operations for July and August 2009, which is a decrease of $2.5 million compared to equity earnings of $1.7 million recognized in the third quarter of 2008. On September 1, 2009, LAC recorded a non-cash goodwill and other intangible asset impairment charge in accordance with generally accepted accounting principles (GAAP). Since our pro rata share of this impairment charge exceeded our equity investment balance, we also recognized a $26.5 million equity loss equal to our equity investment balance as of September 1, 2009.
Our loss per share for the third quarter of 2009 was $0.19 per diluted share on a net loss of $9.3 million, compared to earnings per share of $0.45 per diluted share on net income of $22.1 million for the third quarter of 2008. The $0.64 decrease in diluted earnings per share includes a decline of $0.59 per diluted share related to the results from our equity investment in LAC, which reflects an impact of $0.54 per diluted share from LAC's impairment charge in the reported equity loss for the three months ended September 30, 2009.
Financial Position and Liquidity
Total net receivables decreased 16% to $149.7 million at September 30, 2009 from $178.9 million at September 30, 2008 due primarily to the decrease in sales and a shift toward more cash sales as a result of our tighter credit policies. Our allowance for doubtful accounts balance was approximately $12.2 million at September 30, 2009, an increase of $1.6 million over September 30, 2008. We increased the allowance for doubtful accounts in the fourth quarter of 2008 to reflect an increase in our total past due receivable balances year over year. At September 30, 2009, the allowance for doubtful accounts decreased approximately $1.5 million from December 31, 2008, primarily due to write-offs of certain accounts that were fully reserved and some improvement in our past due receivable balances year over year. Days sales outstanding (DSO) decreased between periods to 35.5 days at September 30, 2009 compared to 36.4 days at September 30, 2008.
Our inventory levels decreased 8% to $318.2 million as of September 30, 2009 compared to $345.9 million as of September 30, 2008. This decrease reflects our focus on optimizing inventory levels across all product classes, but the magnitude of the impact from our inventory initiatives was mitigated as of September 30, 2009 due to more than $50.0 million of strategic forward inventory purchases received near the end of the third quarter of 2009. Our inventory turns, as calculated on a trailing twelve month basis, have decreased to 3.0 times as of September 30, 2009 compared to 3.3 times as of September 30, 2008.
Total debt outstanding decreased to $273.3 million at September 30, 2009 compared to $337.7 million at September 30, 2008. This decrease is a result of our improved cash generation, which frees up additional debt capacity and lowers our borrowing costs.
Current Trends
Continuing adverse economic trends have significantly impacted our industry. These trends include a slowdown in the domestic housing market, with lower housing turnover, sharp drops in new home construction, home value deflation in many markets and a significant tightening of consumer and commercial credit. Additionally, general economic conditions are weak, including increasing unemployment and declining Gross Domestic Product (GDP). Some of the factors that help mitigate the impact of these negative trends on our business include the following:
· the majority of our business is driven by the ongoing maintenance and repair of existing pools and landscaped areas, with approximately 10% of our sales and gross profits tied to new pool or irrigation construction in 2009 (as our sales related to new construction activity have declined, the proportion of our net sales represented by maintenance, repair and replacement (MRR) products has increased to approximately 90%); and
· we believe our service-oriented model, and the investments in our business we are able to make given our financial strength, helps us gain market share.
Despite these mitigating factors, the negative trends noted above have significantly impacted a number of our key markets, including California, Florida and Arizona, with a more recent adverse impact in Texas and other states. We estimate that these trends resulted in the following decreases in new pool construction in the United States since peaking in 2005 at approximately 210,000 new units:
2008 2007 2006 Units (60,000 ) (50,000 ) (10,000 ) % (40 )% (25 )% (5 )%
We believe these decreases represent the first three year decline in new pool construction in our industry history. These trends have continued in 2009 and we estimate they will result in a further decrease in new pool construction of approximately 45,000 units, or 50%. Since these trends worsened from 2007 through the third quarter of 2009, they had a more pronounced impact on our results for the year ended 2008 and the first nine months of 2009. However, as evidenced by our third quarter sales in Florida being up 1% quarter over quarter, we believe these trends have begun to level off in certain major pool markets first impacted by the housing market downturn.
Outlook
Based on the challenging market environment, we expect sales in the fourth quarter of 2009 will be down compared to the same period in 2008. However, we anticipate that fourth quarter sales will decline at a lower rate than the third quarter of 2009 based on easier sales comparisons and improving trends in major pool markets. We expect fourth quarter 2009 gross margins will drop off modestly given tougher comparisons to the fourth quarter of 2008. While we continue to drive targeted expense reductions, the rate of these decreases should continue to moderate in the fourth quarter of 2009 as we lap more of the impact of cost measures implemented in 2008. Altogether, we anticipate our full year 2009 earnings will be in the range of $0.41 to $0.46 per diluted share, including the $0.54 per diluted share impact of LAC's impairment charge included in the reported third quarter 2009 equity loss.
We expect the improvement in cash provided by operations for the nine months ended September 30, 2009 will increase in the fourth quarter of 2009 due to the timing of payments on certain third quarter 2009 forward inventory purchases. Overall, we expect cash provided by operations will exceed $100.0 million for fiscal 2009.
The forward-looking statements in this Outlook section are subject to significant risks and uncertainties, including changes in the economy and the housing market, the sensitivity of our business to weather conditions, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants, and other risks detailed in Part II - Item 1A "Risk Factors" and our "Cautionary Statement for Purpose of the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995".
RESULTS OF OPERATIONS
As of September 30, 2009, we conducted operations through 283 sales 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.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 71.3 71.3 70.8 71.1
Gross profit 28.7 28.7 29.2 28.9
Operating expenses 21.2 20.9 20.8 20.3
Operating income 7.5 7.8 8.4 8.6
Interest expense, net 0.6 0.9 0.7 1.0
Income before income taxes and
equity earnings (loss) 6.9 % 6.9 % 7.7 % 7.6 %
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Our discussion of consolidated operating results includes the operating results from acquisitions in 2008 and 2007. We accounted for these acquisitions using the purchase method of accounting, and we have included the results of operations in our consolidated results since the respective acquisition dates.
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
The following table breaks out our consolidated results into the base business component and the excluded components (sales centers excluded from base business):
(Unaudited) Base Business Excluded Total
(In thousands) Three Months Ended Three Months Ended Three Months Ended
September 30, September 30, September 30,
2009 2008 2009 2008 2009 2008
Net sales $ 427,122 $ 491,959 $ 2,932 $ 1,571 $ 430,054 $ 493,530
Gross profit 122,724 141,265 670 535 123,394 141,800
Gross margin 28.7 % 28.7 % 22.9 % 34.1 % 28.7 % 28.7 %
Operating expenses 90,399 102,436 853 747 91,252 103,183
Expenses as a % of
net sales 21.2 % 20.8 % 29.1 % 47.5 % 21.2 % 20.9 %
Operating income
(loss) 32,325 38,829 (183 ) (212 ) 32,142 38,617
Operating margin 7.6 % 7.9 % (6.2 )% (13.5 )% 7.5 % 7.8 %
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We have excluded the following acquisitions from base business for the periods identified, including the periods covered in the base business table on page 14 under the heading "Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008":
Net
Acquisition Sales Period
Acquired Date Centers Excluded
Acquired
Proplas Plasticos, November 2008 0 January 2009 - September
S.L. (Proplas) 2009
National Pool Tile March 2008 8 January - May 2009 and
(NPT) (1) March - May 2008
Canswim Pools March 2008 1 January - May 2009 and
March - May 2008
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(1) We acquired 15 NPT sales centers and have consolidated 7 of these with existing sales centers, including 4 in March 2008, 2 in the second quarter of 2008 and 1 in April 2009.
We exclude the following sales centers from base business results for a period of 15 months:
· acquired sales centers (see table above);
· existing sales centers consolidated with acquired sales centers;
· closed sales centers;
· consolidated sales centers in cases where we do not expect to maintain the majority of the existing business; and
· sales centers opened in new markets.
As of September 30, 2009, four closed sales centers and one existing sales center that was consolidated with the acquired Proplas sales center were excluded from base business.
We generally allocate corporate overhead expenses to excluded sales centers on the basis of their net sales as a percentage of total net sales. After 15 months of operations, we include acquired, consolidated and new market sales centers in the base business calculation including the comparative prior year period.
The table below summarizes the changes in our sales centers during the quarter ended September 30, 2009:
June 30, 2009 287
Consolidation of sales centers (3 )
Closing of sales centers (1 )
September 30, 2009 283
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Net Sales
The decrease in net sales is primarily due to the current adverse economic trends, which have led to further declines in new pool and irrigation construction activity and deferred discretionary replacement purchases by consumers. Base business sales for the third quarter of 2009 also declined 13% compared to the third quarter of 2008. This includes a 10% decline on the swimming pool side of the business and a 38% decline on the irrigation side of the business, which is more heavily weighted toward new construction and discretionary product sales. Much colder than average temperatures in the third quarter of 2009 adversely impacted sales across the Central and Northern markets by shortening the summer season. Unfavorable currency fluctuations also resulted in a decrease in sales of approximately 1%.
The overall decrease in net sales was partially offset by the following:
· estimated inflationary price increases of approximately 4% overall that we passed through the supply chain; and
· increased sales of certain maintenance and parts products, including a 6% increase in chemical sales due to price inflation and market share growth.
Gross Profit
Three Months Ended
September 30,
(in millions) 2009 2008 Change
Gross profit $ 123.4 $ 141.8 $ (18.4 ) (13 )%
Gross margin 28.7 % 28.7 %
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Gross margin was flat at 28.7% compared to the third quarter of 2008. Favorable impacts that helped offset negative pressures due to the tough competitive pricing environment included the following:
· a shift in sales mix to products in the higher margin maintenance and repair market;
· increased sales of preferred vendor and Pool Corporation private label products; and
· improved pricing and purchasing discipline.
Operating Expenses
Three Months Ended
September 30,
(in millions) 2009 2008 Change
Operating expenses $ 91.3 $ 103.2 $ (11.9 ) (12 )%
Operating margin 21.2 % 20.9 %
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The 12% decrease in operating expenses compared to the third quarter of 2008 reflects the impact of our cost control initiatives including lower payroll related, variable and discretionary expenses. Salary expenses declined 9%, reflecting a 10% reduction in headcount compared to September 30, 2008. Delivery costs decreased 27% quarter over quarter, including $1.0 million in lower vehicle operating expenses (including lower fuel costs and fewer delivery vehicles) and $0.6 million in reduced vehicle rental expenses. Total operating expenses as a percentage of net sales increased between periods due to the decrease in net sales.
Interest Expense
Interest expense decreased 45% between periods due to the impact of much lower debt levels combined with a lower weighted average effective interest rate for the period. Average debt outstanding was 27% lower in the third quarter of 2009 and the weighted average effective interest rate decreased to 3.6% in the third quarter of 2009 from 4.7% in the same period in 2008.
Income Taxes
The decrease in income taxes is due to the decrease in income before income taxes and equity earnings (loss). Our effective income tax rate was 39.30% for the three months ended September 30, 2009 and 40.19% for the three months ended September 30, 2008.
Net Income (Loss) and Earnings (Loss) Per Share
Net loss for the third quarter of 2009 was $9.3 million resulting in loss per share of $0.19 per diluted share, compared to net income of $22.1 million and earnings per share of $0.45 per diluted share in the third quarter of 2008. The $0.64 decrease in diluted earnings per share includes the $0.54 per diluted share impact of LAC's impairment charge included in the reported equity loss for the three months ended September 30, 2009.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
The following table breaks out our consolidated results into the base business component and the excluded components (sales centers excluded from base business):
(Unaudited) Base Business Excluded Total
(In thousands) Nine Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, September 30,
2009 2008 2009 2008 2009 2008
Net sales $ 1,257,864 $ 1,479,786 $ 50,898 $ 44,931 $ 1,308,762 $ 1,524,717
Gross profit 368,668 426,130 13,987 13,776 382,655 439,906
Gross margin 29.3 % 28.8 % 27.5 % 30.7 % 29.2 % 28.9 %
Operating expenses 259,724 295,824 12,715 13,278 272,439 309,102
Expenses as a % of
net sales 20.6 % 20.0 % 25.0 % 29.6 % 20.8 % 20.3 %
Operating income 108,944 130,306 1,272 498 110,216 130,804
Operating margin 8.7 % 8.8 % 2.5 % 1.1 % 8.4 % 8.6 %
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For an explanation of how we calculate base business, please refer to the discussion of base business on page 11 under the heading "Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008".
Since we divested our pool liner manufacturing operation in France at the beginning of April 2008, we have excluded these operations from base business for the comparative three month period ended March 31, 2008.
Net Sales
The new pool and irrigation construction markets continue to face unprecedented adverse conditions created by the combination of significant declines in the real estate and mortgage-backed financing markets. Coupled with the current severely depressed economic environment, these external factors have placed considerable pressure on our top line results. As a result, our sales were negatively impacted as construction activities remained depressed and consumers continued to defer discretionary replacement purchases. Unfavorable weather and currency fluctuations also had an adverse impact on sales for the first nine months of 2009.
Base business sales for the first nine months of 2009 decreased 15% compared to the first nine months of 2008. This includes a 12% decline on the swimming pool side of the business and a 37% decline on the irrigation side of the business, which is more heavily weighted toward new construction and discretionary product sales.
The overall decrease in net sales was partially offset by the following:
· estimated inflationary price increases of approximately 3% to 4% that we passed through the supply chain;
· higher sales of certain maintenance and repair products, including a 7% increase in chemical sales;
· over $17.0 million of increased sales for new drains and related safety products as a result of the Virginia Graeme Baker Pool and Spa Safety Act (VGB Act), which became effective in December 2008 and imposes mandatory federal requirements on the manufacture, distribution and/or sale of suction entrapment avoidance devices such as safety drain covers, public pool drain covers and public pool drain systems; and
· approximately $7.0 million in first quarter sales related to our 2008 acquisitions.
Gross Profit
Nine Months Ended
September 30,
(in millions) 2009 2008 Change
Gross profit $ 382.7 $ 439.9 $ (57.2 ) (13 )%
Gross margin 29.2 % 28.9 %
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Despite the tough competitive pricing environment, gross margin improved 30 basis points compared to the first nine months of 2008. The increase in gross margin is attributable to a shift in sales mix to products in the higher margin maintenance and repair market and specific margin improvement initiatives. Favorable impacts compared to the same period in 2008 included the following (listed in order of estimated magnitude):
· increased sales of preferred vendor and Pool Corporation private label products; and
· benefits recognized in the first half of 2009 resulting from pre-price increase inventory purchases made in the second half of 2008.
Operating Expenses
Nine Months Ended
September 30,
(in millions) 2009 2008 Change
Operating expenses $ 272.4 $ 309.1 $ (36.7 ) (12 )%
Operating margin 20.8 % 20.3 %
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The decrease in operating expenses reflects a 12% decline in base business operating expenses due primarily to the impact of our cost control initiatives including lower payroll related, variable and discretionary expenses. Total headcount as of September 30, 2009 decreased 10% compared to September 30, 2008, driving an 11% decline in total labor and related costs. Total delivery expenses declined 27%, reflecting lower delivery volumes and decreases in both vehicle operating expenses (including lower fuel costs) and vehicle rental expenses.
The decrease in operating expenses was partially offset by the impact of our acquired sales centers, which had approximately $2.0 million in operating expenses during the first quarter of 2009. Total operating expenses as a percentage of net sales increased between periods due to the decrease in net sales.
Interest Expense
Interest expense decreased 39% between periods due to the decrease in our weighted average effective interest rate for the period and a 15% lower average outstanding debt balance. The weighted average effective interest rate decreased to 3.3% in the first nine months of 2009 from 4.7% in the same period in 2008.
Income Taxes
The decrease in income taxes is due to the decrease in income before income taxes and equity earnings (loss). Our effective income tax rate was 39.30% for the nine months ended September 30, 2009 and 39.10% for the nine months ended September 30, 2008.
Net Income and Earnings Per Share
Net income decreased to $32.8 million in the first nine months of 2009 compared to $71.8 million for the first nine months of 2008. Earnings per share for the first nine months of 2009 decreased to $0.67 per diluted share compared to $1.47 in the first nine months of 2008. The $0.80 decrease in diluted earnings per share includes the $0.54 per diluted share impact of LAC's impairment charge included in the reported equity loss for the nine months ended September 30, 2009.
Seasonality and Quarterly Fluctuations
Our business is highly seasonal. In general, sales and operating income are highest during the second and third quarters, which represent the peak months of both swimming pool use and installation and landscape installations and maintenance. 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. Our debt levels peaked a little earlier in 2009 based on early payments . . .
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