You should read the following discussion in conjunction with Management's Discussion and Analysis included in our 2011 Annual Report on Form 10-K. For a discussion of our base business calculations, see the RESULTS OF OPERATIONS section below.

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 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. Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. 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 similar meaning.

No assurance can be given that the results in any forward-looking statements will be achieved and actual results may differ materially due to one or more factors, including the sensitivity of our business to weather conditions, changes in the economy and the housing market, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants and other risks detailed in our 2011 Annual Report on Form 10-K. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.

OVERVIEW

Financial Results

Second quarter sales and earnings were in line with our expectations. We had much stronger comparative results in both April and May as the season peaked earlier than normal in 2012 due to the unusually mild winter, while June results reflected the shift of sales into the first and early second quarter. Net sales increased 7% compared to the second quarter of 2011. Base business sales were up 5% despite a 1% unfavorable impact from currency fluctuations. Base business sales grew 5% on the swimming pool side of the business and 11% on the irrigation side of the business, with growth attributed to market share gains, higher consumer discretionary expenditures, price inflation and the larger installed base of pools.

Gross profit improved 5% compared to the second quarter of 2011, while gross profit as a percentage of net sales (gross margin) declined approximately 50 basis points to 29.4% in the second quarter of 2012. The decrease in gross margin reflects a difficult comparison given the benefit last year from the impact of 2011 mid-year vendor price increases, as well as competitive pricing pressures and unfavorable changes in customer mix in the second quarter of 2012.

Selling and administrative expenses (operating expenses) increased less than 1% in the second quarter of 2012 compared to the same period in 2011. Base business operating expenses were down 2% compared to the second quarter of 2011, as a decrease in employee incentive costs and the impact of currency fluctuations on expenses more than offset a slight increase in other variable costs related to sales growth and higher professional fees and marketing expenses.

Operating income increased 10% over the comparable 2011 period, despite a 1% unfavorable impact from currency fluctuations. Operating income as a percentage of net sales (operating margin) increased 40 basis points to 14.3% for the second quarter of 2012 compared to the same period in 2011.

Net income increased 11% to $64.9 million in the second quarter of 2012, while earnings per share was up 13% to $1.34 per diluted share versus the second quarter in 2011.

Financial Position and Liquidity

Total net receivables increased 2% compared to June 30, 2011 due primarily to higher vendor receivables. Our allowance for doubtful accounts balance was $5.0 million at June 30, 2012, a $0.4 million decrease compared to June 30, 2011 that reflects significant improvements in our receivable aging trends. Days sales outstanding (DSO) improved between periods to 29.3 days at June 30, 2012 compared to 30.7 days at June 30, 2011.

Inventory levels were up 3% to $402.3 million at June 30, 2012, with 2% of the increase attributable to recent acquisitions. Our inventory turns, as calculated on a trailing twelve month basis, increased slightly to 3.3 times at June 30, 2012 compared to 3.2 times at June 30, 2011.

Total debt outstanding was $309.8 million at June 30, 2012, an increase of $3.8 million compared to June 30, 2011.

Current Trends and Outlook

For a detailed discussion of trends, see the Current Trends and Outlook section of Management's Discussion and Analysis included in Item 7 of our 2011 Annual Report on Form 10-K. While there have not been any significant changes in these trends, we believe the economic environment remains uncertain given the most recent consumer confidence and employment data in the United States and the lingering debt and economic issues in Europe.

Based on the early peak of the 2012 season and the uncertain economic environment, we have tightened our 2012 earnings guidance to a range of $1.75 to $1.82 per diluted share from our previous guidance of $1.75 to $1.85 per diluted share. This updated range still reflects expected base business sales growth of 5% to 8% for the year, although we have adjusted expectations for the second half of 2012 with projected base business sales growth of 2% to 4%.

While we had anticipated that gross margin would be neutral to slightly positive for the second half of the year, we currently expect that gross margin will be down from last year due primarily to the difficult third quarter comparison (gross margin improved 60 basis points year over year in the third quarter of 2011, including the benefit related to our inventory purchases in advance of mid-year vendor price increases).

We expect modest expense growth overall for the year, with base business expenses flat or down slightly in the last six months of 2012 due to more modest sales expectations and lower employee incentive expenses. However, if our sales growth is higher than projected, as was the case in the first quarter, we would logically expect expenses to be modestly higher.

We expect that our effective income tax rate for the full year will be approximately 38%, compared to our more normalized full year rate of approximately 39%. We expect the third quarter rate will be slightly below the estimated annual rate due to the expiration of the statutes of limitations for another tax year, while the fourth quarter rate should be slightly above the full year rate.

Consistent with our results for the first half of 2012, we anticipate base business results will generate operating profit growth as a percentage of base business sales growth (contribution margin) of approximately 20% for the full year. We also expect cash provided by operations will exceed net income.

We opened one new sales center location in June 2012 and have five others now scheduled to open in the second half of 2012.

RESULTS OF OPERATIONS

As of June 30, 2012, we conducted operations through 308 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          Six Months Ended
                                              June 30,                   June 30,
                                         2012          2011           2012       2011
   Net sales                            100.0 %       100.0 %        100.0 %    100.0 %
   Cost of sales                         70.6          70.1           70.8       70.3
     Gross profit                        29.4          29.9           29.2       29.7
   Operating expenses                    15.1          16.1           19.0       20.0
     Operating income                    14.3          13.9           10.2        9.7
   Interest expense, net                  0.3           0.3            0.3        0.3
   Income before income taxes and
   equity earnings                       14.0 %        13.6 %          9.9 %      9.3 %

Note: Due to rounding, percentages may not add up to operating income or income before income taxes and equity earnings.

Our discussion of consolidated operating results includes the operating results from acquisitions in 2012 and 2011. We have included the results of operations in our consolidated results since the respective acquisition dates.

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

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
                               June 30,               June 30,               June 30,
                          2012       2011        2012       2011        2012       2011
 Net sales            $  739,650  $ 703,722  $   17,525  $   2,701  $  757,175  $ 706,423

 Gross profit            217,581    210,694       4,824        745     222,405    211,439
 Gross margin               29.4 %     29.9 %      27.5 %     27.6 %      29.4 %     29.9 %

 Operating expenses      110,329    112,539       3,942        979     114,271    113,518
 Expenses as a % of
 net sales                  14.9 %     16.0 %      22.5 %     36.2 %      15.1 %     16.1 %

 Operating income
 (loss)                  107,252     98,155         882       (234 )   108,134     97,921
 Operating margin           14.5 %     13.9 %       5.0 %     (8.7 )%     14.3 %     13.9 %

In our calculation of base business results, we have excluded the following acquisitions for the periods identified:

                                                 Net
                                                Sales
                               Acquisition     Centers           Periods
     Acquired (1)                 Date        Acquired           Excluded
     CCR Distribution         March 2012          1       April-June 2012
     Ideal Distributors       February 2012       4       April-June 2012
     Ltd.
     G.L. Cornell Company     December 2011       1       April-June 2012
     Poolway                  November 2011       1       April-June 2012
     Schwimmbadtechnik GmbH
     The Kilpatrick           May 2011            4       April-June 2012 and
     Company, Inc.                                         May-June 2011

(1) We acquired certain distribution assets of each of these companies.

We exclude the following sales centers from base business results for a period of 15 months (parenthetical numbers for each category indicate the number of sales centers excluded as of June 30, 2012):

· acquired sales centers (see table above);

· existing sales centers consolidated with acquired sales centers (0);

· closed sales centers (0);

· consolidated sales centers in cases where we do not expect to maintain the majority of the existing business (0); and

· sales centers opened in new markets (3).

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 in the first six months of 2012:

                             December 31, 2011 298
                              Acquired           5
                              New locations      5
                             June 30, 2012     308

Net Sales

Net sales for the second quarter of 2012 increased 7%, including a 5% increase in base business sales despite a 1% decrease attributed to the impact of unfavorable currency fluctuations. Our base business sales growth included a 5% increase on the swimming pool side of the business and an 11% increase on the irrigation side of the business. The lower growth rate for the swimming pool business reflects the shift of some sales into the first quarter due to the unusually mild winter (see discussion of significant weather impacts under the subheading Seasonality and Quarterly Fluctuations beginning on page 16) and the impact of lower base business sales in Europe compared to the second quarter of 2011.

The overall base business sales increase reflects the impact of the following (listed in order of estimated magnitude):

· market share gains evidenced by sales growth rates for expanded product offerings such as building materials (12% growth) and higher base business sales growth for the irrigation side of the business;

· improvement in consumer discretionary expenditures, including some market recovery in remodeling activity and increased sales of above ground pools (14% growth);

· the impact of inflationary product cost increases (estimated at approximately 1% to 2%); and

· higher sales of non-discretionary products due to the increased installed base of pools, which we estimate grew 1% over the past year.

Gross Profit

                                     Three Months Ended
                                          June 30,
                   (in millions)      2012         2011        Change
                   Gross profit     $   222.4     $ 211.4   $ 11.0   5 %
                   Gross margin          29.4 %      29.9 %

Gross margin declined approximately 50 basis points between periods due primarily to a difficult comparison to the second quarter of 2011 and competitive pricing pressures, which we believe intensified in June based on the early slowdown of the 2012 season. In the second quarter of 2011, our gross margin was up 50 basis points from the same period in 2010, including the benefit from inventory purchases we made in advance of 2011 mid-year vendor price increases. The comparative decline in the second quarter of 2012 also reflected unfavorable changes in customer mix and lower gross margins from recent acquisitions, with partially offsetting favorable impacts attributable to lower credit and debit card fees as a percentage of sales and continued improvements in purchasing and pricing discipline.

Operating Expenses

                                                  Three Months Ended
                                                       June 30,
       (in millions)                               2012          2011       Change
       Operating expenses                        $   114.3     $ 113.5   $  0.8   1 %
       Operating expenses as a % of net sales         15.1 %      16.1 %

Operating expenses were up less than 1% compared to the second quarter of 2011, with higher expenses related to recent acquisitions and new market sales center openings largely offset by a 2% drop in base business operating expenses. Base business operating expenses declined due to a $2.4 million decrease in employee incentive costs, a $1.1 million impact from currency fluctuations, a $0.8 million reduction in bad debt expense and small decreases in other expense categories including delivery costs. These expense decreases were partially offset by a $2.1 million increase in professional fees and marketing expenses and slightly higher other variable costs related to the growth in sales, including higher salary costs due to a 3% increase in average headcount excluding acquisitions.

Interest Expense, net

Interest expense, net was up $0.4 million between periods due primarily to a year over year increase in interest expense related to borrowings. This increase was attributable to a higher weighted average effective interest rate, which increased to 2.5% for the second quarter of 2012 from 2.2% for the second quarter of 2011.

Income Taxes

Our effective income tax rate was 38.72% for the three months ended June 30, 2012 compared to 39.20% for the three months ended June 30, 2011. There were no significant changes in our estimates related to our income tax provision during the second quarter of 2012.

Net Income and Earnings Per Share

Net income improved 11% to $64.9 million compared to the second quarter of 2011, while earnings per share increased 13% quarter over quarter to $1.34 per diluted share. The increase in earnings per share included an accretive impact of approximately $0.01 per diluted share from the reduction in our weighted average shares outstanding due to our share repurchase activities during the year and an offsetting impact of approximately $0.01 per diluted share related to unfavorable currency fluctuations.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

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)             Six Months Ended        Six Months Ended        Six Months Ended
                               June 30,                June 30,                June 30,
                         2012         2011        2012       2011        2012         2011
Net sales            $ 1,090,447  $ 1,015,387  $  28,682   $ 3,925   $ 1,119,129  $ 1,019,312

Gross profit             318,856      301,751      8,112     1,098       326,968      302,849
Gross margin                29.2 %       29.7 %     28.3 %    28.0 %        29.2 %       29.7 %

Operating expenses       205,019      202,820      7,794     1,532       212,813      204,352
Expenses as a % of
net sales                   18.8 %       20.0 %     27.2 %    39.0 %        19.0 %       20.0 %

Operating income
(loss)                   113,837       98,931        318      (434 )     114,155       98,497
Operating margin            10.4 %        9.7 %      1.1 %   (11.1 )%       10.2 %        9.7 %

In our calculation of base business results, we have excluded the following acquisitions for the periods identified:

                                                Net
                                               Sales
                              Acquisition     Centers             Periods
    Acquired (1)                 Date        Acquired            Excluded
    CCR Distribution         March 2012          1       March-June 2012
    Ideal Distributors       February 2012       4       February-June 2012
    Ltd.
    G.L. Cornell Company     December 2011       1       January-June 2012
    Poolway                  November 2011       1       January-June 2012
    Schwimmbadtechnik GmbH
    The Kilpatrick           May 2011            4       January-June 2012 and
    Company, Inc.                                        May-June 2011
    Turf Equipment Supply    December 2010       3       January-February 2012 and
    Co.                                                   January-February 2011
    Pool Boat and Leisure,   December 2010       1       January-February 2012 and
    S.A.                                                  January-February 2011

(1) We acquired certain distribution assets of each of these companies.

For a more detailed explanation of how we calculated base business results and a summary of the changes in our sales centers since December 31, 2011, please refer to page 11 under the heading "Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011".

Net Sales

Net sales for the first half of 2012 increased 10%, with an increase of over 7% in base business sales and close to a 3% increase related to recent acquisitions and new market sales center openings. Our base business sales growth included a 7% increase on both the swimming pool side of the business and the irrigation side of the business. While base business sales grew 9% for our North American swimming pool business, this growth was partially offset by a 1% decline from unfavorable currency fluctuations and the impact of lower base business sales in Europe. In local currencies, net sales in Europe declined 4% compared to the first half of 2011.

The overall base business sales increase reflects the impact of the following (listed in order of estimated magnitude):

· market share gains evidenced by sales growth rates for expanded product offerings such as building materials (see discussion below) and an expanded customer base (7% growth for our retail customer segment, which is a strategic priority);

· the gradual improvement in consumer discretionary expenditures, including some market recovery in remodeling activity and increased sales of above ground pools (18% growth);

· the impact of inflationary product cost increases (estimated at approximately 1% to 2%); and

· higher sales of non-discretionary products due to the increased installed base of pools, which we estimate grew 1% over the past year.

Sales of building materials, tile and packaged pool products grew by over 17% compared to the first half of 2011, although collectively these products only accounted for approximately 12% of our total sales in the first half of 2012. Chemical sales grew 6%, with a small benefit overall from price inflation despite some lingering price deflation for certain chemical products. Sales for parts products increased only 2% compared to the first half of 2011, reflecting a potential consumer shift from repairing to replacing swimming pool equipment.

Sales in 2012 also benefited from favorable weather conditions through May, with an unusually mild winter and record warm spring temperatures driving a higher first quarter base business sales growth rate and the early peak to the 2012 season. However, June sales were negatively impacted by unfavorable weather conditions compared to the same period in 2011. See discussion of significant weather impacts under the subheading Seasonality and Quarterly Fluctuations beginning on page 16.

Gross Profit

                                      Six Months Ended
                                          June 30,
                    (in millions)      2012       2011        Change
                    Gross profit     $   327.0   $ 302.8   $ 24.2   8 %
                    Gross margin          29.2 %    29.7 %

Gross margin declined 50 basis points between periods due primarily to difficult comparisons to 2011 (when our gross margin was up 60 basis points from the first half of 2010) and also due to competitive pricing pressures, which intensified in the latter part of the second quarter of 2012. Going into the 2011 season, we made greater early buy inventory purchases in advance of year-end vendor price increases, which benefited our first quarter 2011 gross margin. We made more modest early buy inventory purchases going into the 2012 season, in part because we made additional bulk inventory purchases in advance of mid-year 2011 vendor price increases. These strategic purchases benefited our gross margin in the second and third quarters of 2011.

Other impacts to comparative gross margin were largely offsetting. Favorable impacts included continued improvements in purchasing and pricing discipline and lower credit and debit card fees as a percentage of net sales, while unfavorable impacts included higher inventory obsolescence adjustments and unfavorable changes in customer mix.

Operating Expenses

                                                   Six Months Ended
                                                       June 30,
        (in millions)                               2012        2011       Change
        Operating expenses                        $   212.8   $ 204.4   $  8.4   4 %
        Operating expenses as a % of net sales         19.0 %    20.0 %

Operating expenses were up 4% compared to the first six months of 2011, with a modest 1% increase in base business operating expenses attributable to the following:

· a $2.0 million increase in professional fees and marketing expenses;

· higher salary costs due to a 3% increase in average headcount excluding acquisitions; and

· increases in other variable expenses related to the growth in sales.

These increases were partially offset by the impact of currency fluctuations on expenses, a $0.9 million reduction in bad debt expense (driven by significant improvements in our past due receivable aging trends) and small decreases in other expense categories including employee incentive costs.

Interest Expense, net

Interest expense, net increased 6% between periods due to higher interest expense related to borrowings as average debt levels were up 8% compared to the first half of 2011. The weighted average effective interest rate was up slightly between periods to 2.5% for the first six months of 2012 compared to 2.4% for the first six months of 2011.

Income Taxes

Our effective income tax rate was 38.07% for the six months ended June 30, 2012 compared to 39.20% for the six months ended June 30, 2011. The decrease in the effective rate between periods includes the impact of a $0.7 million reduction in our estimated annual provision for income taxes recorded in the first quarter of 2012. While this was a routine accounting entry related to previously uncertain tax positions recorded upon the expiration of statutes of limitations for our 2007 income tax returns, the timing was non-routine because we postponed the filing of these returns from September 2008 to January 2009 in accordance with the extended deadline set by the Internal Revenue Service due to Hurricane Gustav.

Net Income and Earnings Per Share

Net income improved 18% to $68.6 million compared to the first half of 2011, while earnings per share increased 21% to $1.42 per diluted share. Earnings per share for the first half of 2012 included the following:

. . .