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2005 FINANCIAL OVERVIEW
Financial Results
Our 2005 financial results reflect the continuing
execution of our strategies for profitable revenue growth. We have
built on our core strengths with a focus on growing our customers’
businesses faster than the overall market and incrementally improving
all aspects of our business operations.
Net sales grew 18% to $1.55 billion in 2005
compared to $1.31 billion in 2004. This is higher than the 13% sales
growth experienced in 2004 due primarily to the increase in our
base business growth rate as well as fourth quarter sales from acquired
service centers, which includes the 40 Horizon service centers acquired
in October 2005. Our base business growth has been relatively stable
at 14%, 10% and 11% for 2005, 2004 and 2003, respectively. This
growth contrasts with the growth of the overall market for swimming
pool equipment and supplies, which we estimate grew on average from
4% to 6% per year over this same time period. We attribute much
of our growth to the success of the programs we offer to our customers,
which are aimed at growing their businesses. In 2005, product pricing
also contributed to the sales growth as we were able to pass most
vendor price increases through to customers.
Our gross profit as a percent of net sales
(gross margin) decreased by approximately 40 basis points in 2005
compared to 2004, reflecting the impact of the divestiture of our
North American manufacturing assets in December 2004.
Our operating income increased 24% to $140.3
million in 2005 due primarily to the growth in sales, as well as
our ability to leverage our existing distribution and administrative
infrastructure and our success with ongoing operational improvements.
Net income increased 25% in 2005 and included $1.5 million of net
equity earnings from our investment in Latham Acquisition Corporation
(LAC).
Financial Position and Liquidity
In 2005, both our cash flow provided by operations
and year-end working capital balance were impacted by a greater
amount of early buy inventory purchases that we received as of year-end.
We made aggressive inventory purchases during the fourth quarter
of 2005 to take advantage of price discounts and to mitigate the
potential adverse gross margin impact of expected 2006 price increases.
As a result of the inventory purchases received
and paid for in the fourth quarter of 2005, which totaled approximately
$53.0 million, partially offset by the deferral of third and fourth
quarter 2005 estimated federal income tax payments, our cash from
operations decreased to $38.1 million in 2005 from $56.4 million
in 2004. Coupled with net proceeds from financing activities of
approximately $119.5 million, cash from operations helped fund our
acquisition of Horizon in the fourth quarter of 2005, $32.1 million
of share repurchases in 2005 and the payment of our quarterly cash
dividend to shareholders, which we increased in the second quarter
of 2005.
Our year-end inventory levels increased 69%
to $330.6 million as of December 31, 2005, due primarily to our
increased early buy inventory purchases and the Horizon acquisition.
As a result of this increase, inventory turns decreased slightly
to 4.3 days in 2005 from 4.5 days in 2004. Days sales outstanding
(DSO) remained consistent between years at 33.6 days for fiscal
2005 compared to 33.4 days for fiscal 2004. We continue to maintain
a healthy current ratio, which was down slightly to 1.6 as of December
31, 2005 compared to 1.7 as of December 31, 2004.
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