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General (continued)
Beginning in the fourth quarter
of 2002, we began calculating our “base business” growth,
which is consistent with measures used by other distributors. We
calculate base business growth by excluding the following service
centers from the calculation for 15 months:
- Service centers acquired within the past
15 months;
- Service centers consolidated with acquired
service centers; and
- New service centers opened in new markets
in the past 15 months.
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
Swimming Pool Industry
We believe that the swimming
pool industry is relatively young, with room for tremendous growth.
Of the approximately 68 million households in the United States
that have the economic capacity and the yard space to have a swimming
pool, barely 10% own a pool. The industry has grown at a 4-5% annual
rate for the past 20 years.
We believe the swimming pool
industry will continue to grow 4-5% annually over the next five
years, primarily by the need to maintain the growing installed base
of pools and secondarily by new pool installations.
The greater part of revenues
in our industry is derived from the maintenance of existing swimming
pools and the repair and replacement of the equipment that maintains
those pools. Thus, the industry generally has not been negatively
affected by economic downturns, although there is no assurance that
this will continue.
The demand for new pools is driven
by the perceived benefits of pool ownership including relaxation,
entertainment, family activity, exercise, convenience and landscaping.
The industry competes for new pool sales against other discretionary
consumer purchases such as kitchen and bathroom remodeling, boats,
motorcycles, recreational vehicles and vacations.
The business in the swimming
pool industry is seasonal, and weather is the biggest challenge.
The industry is also affected by other factors including consumer
saving and discretionary spending levels, the rate of new housing
construction and consumer attitudes toward pool products for environmental
or safety reasons.
Critical Accounting Policies
Critical accounting policies
are those that are both important to the accurate portrayal of a
company’s financial condition and results, and require the
most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are
inherently uncertain. We believe that the nature of our business
is such that there are few, if any, complex challenges in accounting
for operations.
In order to prepare financial
statements that conform to accounting principles generally accepted
in the United States (GAAP), we make estimates and assumptions that
affect the amounts reported in our financial statements and accompanying
notes. Certain estimates are particularly sensitive due to their
significance to the financial statements and the possibility that
future events may be significantly different from our expectations.
We have identified the following
five accounting policies that require us to make estimates in order
to present fairly our consolidated financial position and results
of operations.
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