UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K





x
            ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the fiscal year ended December 31, 2009





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 Number: 0-26640














POOL
CORPORATION


(Exact
name of Registrant as specified in its charter)





Delaware
            36-3943363(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)109
      Northpark Boulevard, Covington, Louisiana
            70433-5001(Address
      of principal executive offices)
            (Zip
      Code)





985-892-5521


(Registrant’s
telephone number, including area code)





Securities
registered pursuant to Section 12(b) of the Act:





Title
      of each class
            Name
      of each exchange on which registeredCommon
      Stock, par value $0.001 per share
            NASDAQ
      Global Select Market





Securities
registered pursuant to Section 12(g) of the Act: None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    YES  x    NO   ̈





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.    YES   ̈    NO  x




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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulations S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).    YES   ̈   NO   ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.     ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
accelerated filer x                                                                                                                          Accelerated
filer  ̈





Non-accelerated
filer  ̈ 
(Do not check if a smaller reporting
company)                                          Smaller
reporting company  ̈





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).  YES   ̈    NOx





The
aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant based on the closing sales price of the
Registrant’s common stock as of June 30, 2009 was
$776,671,055.





As of
February 22, 2010, the Registrant had 49,164,271 shares of common
stock outstanding.





Documents
Incorporated by Reference





Portions
of the Registrant’s Proxy Statement to be mailed to stockholders on or about
March 26, 2010 for the


Annual
Meeting to be held on May 4, 2010, are incorporated by reference in
Part III of this Form 10-K.

















POOL
CORPORATION





TABLE
OF CONTENTS





PagePART
      I.Item
      1.
            Business
            1Item
      1A.
            Risk Factors
            8Item
      1B.
            Unresolved Staff Comments
            11Item
      2.
            Properties
            12Item
      3.
            Legal Proceedings
            14PART
      II.Item
      5.
            Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
            14Item
      6.
            Selected Financial Data
            16Item
      7.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            17Item
      7A.
            Quantitative and Qualitative Disclosures about Market
      Risk
            37Item
      8.
            Financial Statements and Supplementary
    Data
            38Item
      9.
            Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
            67Item
      9A.
            Controls and Procedures
            67Item
      9B.
            Other Information
            70PART III.Item
      10.
            Directors, Executive Officers and Corporate
      Governance
            70Item
      11.
            Executive Compensation
            70Item
      12.
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            70Item
      13.
            Certain Relationships and Related Transactions, and
      Director Independence
            70Item
      14.
            Principal Accounting Fees and Services
            70PART
      IV.Item
      15.
            Exhibits, Financial Statement Schedules
            71Signatures
            
            72














PART I.





Item
1.  Business





General





Based on
industry data, Pool Corporation (the Company, which may be
referred to as POOL, we, usorour) is the
world’s largest wholesale distributor of swimming pool supplies, equipment and
related leisure products and one of the top three distributors of landscape and
irrigation products in the United States.  The Company was
incorporated in the State of Delaware in 1993 and has grown from a regional
distributor to a multi-national, multi-network distribution
company.





Our
industry is highly fragmented, and as such, we add considerable value to the
industry by purchasing products from a large number of manufacturers and then
distributing the products and offering a range of services to our customer base
on conditions that are more favorable than these customers could obtain on their
own.





As of
December 31, 2009 we operated 287 sales centers in North America and Europe
through our three distribution networks: SCP Distributors LLC (SCP), Superior
Pool Products LLC (Superior) and Horizon Distributors, Inc.
(Horizon).  Superior and Horizon are both wholly owned subsidiaries of
SCP, which is wholly owned by Pool Corporation.





Our
Industry





We
believe that the swimming pool industry is relatively young, with room for
continued growth from increased penetration of new pools.  Of the
approximately 70 million homes in the United States that have the economic
capacity and the yard space to have a swimming pool, approximately 13% own a
pool.  Higher rates of new home construction from 1996 to 2005 have
added to the market expansion opportunity for pool ownership, particularly in
larger pool markets.





We
believe favorable demographic and socioeconomic trends have and will continue to
positively impact the long-term prospects of our industry.  These
favorable trends include the following:





·
            long-term
      growth in housing units in warmer markets due to the population migration
      towards the south, which contributes to the growing installed base of
      pools that homeowners must
maintain;


·
            increased
      homeowner spending on outdoor living spaces for relaxation and
      entertainment; and


·
            consumers
      bundling the purchase of a swimming pool and other products, with new
      irrigation systems and landscaping often being key components to both pool
      installations and remodels.





The
irrigation and landscape industry has many characteristics in common with the
pool industry, and we believe that it benefits from the same favorable
demographic and socioeconomic trends and will realize long-term growth rates
similar to the pool industry.





Approximately
70% of consumer spending in the pool industry is derived from the maintenance of
existing swimming pools.  Maintaining proper chemical balance and the
related upkeep and repair of swimming pool equipment, such as pumps, heaters,
filters and safety equipment creates a non-discretionary demand for pool
chemicals, equipment and other related parts and supplies.  We also
believe cosmetic considerations such as a pool’s appearance and the overall look
of backyard environments create an ongoing demand for other maintenance related
goods and certain discretionary products.




We believe
that the recurring nature of the maintenance and repair market has helped
maintain a relatively consistent rate of industry growth historically, and has
helped cushion the negative impact on revenues in periods when unfavorable
economic conditions and softness in the housing market adversely impact pool
construction activities such as 2006 through 2009.




1


The table
below reflects growth in the domestic installed base of in-ground and
above-ground swimming pools over the past 11 years (based on Company estimates
and information from 2007 P.K. Data, Inc. reports):







The
replacement and refurbish market includes major swimming pool repairs and
currently accounts for approximately 20% of consumer spending in the pool
industry.  This activity is more sensitive to economic factors that
impact consumer spending compared to the maintenance and minor repair
market.  New swimming pool construction comprises the bulk of the
remaining consumer spending in the pool industry.  The demand for new pools
is driven by the perceived benefits of pool ownership including relaxation,
entertainment, family activity, exercise and convenience.  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
landscape and irrigation distribution business is split between residential and
commercial markets, with the majority of sales related to the residential
market.  Landscape and irrigation maintenance activities account for
40% of total spending in the irrigation industry, with the remaining 60% of
spending related to irrigation construction and other discretionary related
products.  As such, our irrigation business is more heavily weighted
towards the sale of discretionary related products compared to our pool
business.





General economic
conditions(as commonly measured by Gross Domestic Product or GDP), the
availability of consumer credit and certain trends in the
housing market affect our industry, particularly new pool and irrigation system
starts.Positive GDP trends may have a favorable impact on
industry starts, while negative trends may be unfavorable for industry
starts.  We believe there is a direct correlation between industry
starts and the rate of housing turnover and home appreciation over time, with
higher rates of home turnover and appreciation having a positive impact on
starts over time.  We also believe that homeowners’ access to consumer
credit, particularly as facilitated by mortgage-backed financing markets, is a
critical enabling factor in the purchase of new swimming pools and irrigation
systems.





The
continuing adverse economic trends that began in 2006 and worsened through 2009
have negatively impacted our industry and our performance.  Specific
issues included a slowdown in the domestic housing market, with lower housing
turnover, a sharp drop in new home construction, home value deflation in many
markets and a significant tightening of consumer and commercial
credit.  The downturn in the real estate and credit markets that began
in 2006 was compounded by the overall deterioration in general economic
conditions in late 2008 and throughout 2009.  These trends resulted in
significant decreases in new construction activities, and we estimate that pool
construction has declined approximately 80% since 2005.  Pool
refurbishment and replacement activities were also significantly impacted as
consumers began to defer discretionary purchases as the economy
worsened.  The impact of these trends was more severe in 2007 and 2008
in some of the largest pool markets including California, Florida and Arizona,
with a more recent adverse impact in Texas and other states.





Since
irrigation is more heavily weighted towards new construction activities, this
has resulted in a greater impact on our Horizon business as new home and
commercial construction rates have fallen.  We have consolidated
several facilities and significantly reduced operating costs related to our
Horizon network, and we expect these measures will mitigate the greater rate of
earnings decline for our irrigation business.






2





We are
encouraged by indications that the downward economic trends of the past several
years are moderating, which is evidenced by the fact that the level of sales
declines in the major pool markets first impacted by the negative external
trends diminished as 2009 progressed.  The landscape and irrigation
markets that we participate in have not yet shown improvement as these markets
tend to lag the trends in the corresponding pool markets by up to a
year.





We
believe there is potential for significant sales recovery over the next several
years, driven by both the aging of the installed base of in-ground pools and
pent-up demand for replacement and retrofit activity that consumers have
deferred due to recent market conditions.  We also anticipate that new
pool and irrigation construction activities will gradually begin to return to
more normalized levels, but weexpect the replacement
and refurbish market will rebound before the new construction market and believe
it may be 2011 before there is growth in new construction
activities.  We expect that sales levels should once again benefit
from long-term industry growth dynamics and that over the long-term the industry
will return to an annual growth rate of approximately 2% to 6% when the overall
economy does rebound and the real estate and credit markets revert to
normal.





Our
industry is seasonal and weather is one of the principal external factors that
affect our business.  Peak industry activity occurs during the warmest
months of the year, typically April through September.  Unseasonable
warming or cooling trends can delay or accelerate the start or end of the pool
and landscape season, impacting our maintenance and repair
sales.  These impacts at the shoulders of the season are generally
more pronounced in northern markets.  Weather also impacts our sales
of construction and installation products to the extent that above average
precipitation, late spring thaws in northern markets and other extreme weather
conditions delay, interrupt or cancel current or planned construction and
installation activities.





The
industry is also affected by other factors including, but not limited to,
consumer attitudes toward pool and landscape products for environmental or
safety reasons.





Business
Strategy and Growth





Our
mission is to provide exceptional value to our customers and suppliers, in order
to provide exceptional return to our shareholders while providing exceptional
opportunities to our employees.  Our three core strategies are to
promote the growth of our industry, to promote the growth of our customers’
businesses and to continuously strive to operate more effectively.





We
promote the growth of the industry through various advertising and promotional
programs intended to raise consumer awareness of the benefits and affordability
of pool ownership, the ease of pool maintenance and the many ways in which a
pool and the surrounding spaces may be enjoyed beyond swimming.  These
programs include media advertising, industry-oriented website development such
as www.swimmingpool.comTM
and public relations campaigns.  We use these programs as tools to
educate consumers and lead prospective pool owners to our
customers.





We
promote the growth of our customers’ businesses by offering comprehensive
support programs that include promotional tools and marketing support to help
our customers generate increased sales.  Our uniquely tailored
programs include such features as customer lead generation, personalized
websites, brochures, marketing campaigns and business development
training.  As a customer service, we also provide certain retail store
customers assistance with everything from site selection to store layout and
design to business management system implementation.  These benefits
and other exclusive services are offered through our retail brand licensing
program called The Backyard Place®, which is one of
our key growth initiatives.  In return for these services, customers
make commitments to meet minimum purchase levels, stock a minimum of nine
specific product categories and operate within The Backyard Place® guidelines
(including weekend hour requirements).  We launched The Backyard Place® program in 2006
and we currently have over 120 agreements with retail store
customers.  Our total sales to these customers grew 15% in 2009
compared to 2008.





In
addition to our efforts aimed at industry and customer growth, we strive to
operate more effectively by continuously focusing on improvements in our
operations such as product sourcing, procurement and logistics initiatives,
adoption of enhanced business practices and improved working capital
management.  We have increased our product breadth (as described
in the “Customers and Products” section below) and expanded our sales center
networks through acquisitions, new sales center openings and expansions of
existing sales centers.  Historically, acquisitions have been an
important source of sales growth.






3





Since
2005, we have opened 18 new sales centers (net of subsequent closings and
consolidations of new sales centers) and successfully completed 9 acquisitions
consisting of 74 sales centers (net of sales center closings and consolidations
within one year of acquisition).  Given the current challenging
external environment, we did not open any new sales centers in 2009 and expect
to open only two new sales centers in 2010.  We plan to continue to
selectively expand our domestic swimming pool distribution networks and to take
advantage of opportunities to further expand our domestic irrigation and
international swimming pool distribution networks via both acquisitions and new
sales center openings.  We plan to make strategic acquisitions to
further penetrate existing markets and expand into both new geographic markets
and new product categories.  For additional discussion of our recent
acquisitions, see Note 2 of “Notes to Consolidated Financial Statements,”
included in Item 8 of this Form 10-K.





Based
upon industry data, we believe our industry grew at a 2% to 6% annual rate for
the period between 2000 and 2005 but contracted each year between 2006 and
2009.  Historically, our sales growth has exceeded the industry’s
growth rates and allowed us to increase market share.  We believe that
our high service levels and expanded product offerings have also enabled us to
gain market share during the past four years as our industry
contracted.  Going forward, we expect to realize sales growth higher
than the industry average due to increases in market share and further expansion
of our product offerings.





We
estimate that pricing inflation has averaged 1% to 3% annually in our industry
over the past 10 years.  In 2010, we do not expect industry price
increases after experiencing above average inflationary increases in product
costs in 2008 and 2009.  We generally pass industry price increases
through the supply chain and make strategic volume inventory purchases ahead of
vendor price increases.  Based on the volume inventory purchases we
made ahead of vendor price increases in the second half of 2008, we realized a
favorable impact to gross margin in the first half of 2009.  Since
there were no similar late season vendor price increases in 2009, we expect
tough gross margin comparisons to 2009 in the first half of 2010.





Customers
and Products





We serve
roughly 70,000 customers, none of which account for more than 1% of our
sales.  We primarily serve five types of customers:





·
            swimming
      pool remodelers and builders;


·
            retail
      swimming pool stores;


·
            swimming
      pool repair and service businesses;


·
            landscape
      construction and maintenance contractors;
and


·
            golf
      courses.





The
majority of these customers are small, family owned businesses with relatively
limited capital resources.  The current economic environment has had
the greatest impact on swimming pool remodelers and builders and landscape
construction companies.  We have seen a modest contraction in our
customer base in these segments over the last three years.





We
conduct our operations through over 280 sales centers in North America and
Europe. Our primary markets, which have the highest concentration of swimming
pools, are California, Florida, Texas and Arizona, representing approximately
51% of our net sales in 2009.  We use a combination of local and
international sales and marketing personnel to promote the growth of our
business and develop and strengthen our customers’ businesses.  Our
sales and marketing personnel focus on developing customer programs and
promotional activities, creating and enhancing sales management tools and
providing product and market expertise.  Our local sales personnel
work from the sales centers and are charged with understanding and meeting our
customers’ specific needs.





We offer
our customers more than 100,000 national brand and Pool Corporation branded
products.  We believe that our selection of pool equipment, supplies,
chemicals, replacement parts, irrigation and landscape products and
complementary products is the most comprehensive in the industry.  The
products we sell can be categorized as follows:





·
            maintenance
      products such as chemicals, supplies and pool
  accessories;


·
            repair
      and replacement parts for cleaners, filters, heaters, pumps and
      lights;


·
            packaged
      pool kits including walls, liners, braces and coping for in-ground and
      above-ground pools;






4




·
            pool
      equipment and components for new pool construction and the remodeling of
      existing pools;


·
            irrigation
      and landscape products, including professional lawn care equipment;
      and


·
            complementary
      products, which consists of a number of product categories and
      includes:


–­
            building
      materials used for pool installations and remodeling, such as concrete,
      plumbing and electrical components and pool surface and decking materials;
      and


–­
            other
      discretionary recreational and related outdoor lifestyle products that
      enhance consumers’ use and enjoyment of outdoor living spaces, such as
      pool toys and games, spas and
grills.





We track and monitor the
majority of our sales by various product lines and product categories, primarily
for consideration in incentive plan programs and to provide support for sales
and marketing efforts.  We currently have over 300 product lines and
over 40 product categories.Based on our 2009 product
classifications, sales for our pool and spa chemicals product category as a
percentage of total net sales was 17% in 2009, 14% in 2008 and 12% in
2007.  We attribute this growth to increases in our market share, a
shift in product mix resulting from the decline in construction related products
and chemical price increases.  No other product category accounted for
10% or more of total net sales in any of the last three fiscal
years.





We
categorize our maintenance, repair and replacement products into the following
two groupings:





·
            maintenance
      and minor repair (non-discretionary);
and


·
            major
      repair and refurbishment (partially
  discretionary).





Maintenance
and minor repair products are primarily non-discretionary in nature, meaning
that these items must be purchased by end users to maintain existing swimming
pools and landscaped areas.  In 2009, the sale of maintenance and
minor repair products accounted for approximately 70% of our sales and gross
profits while approximately 30% of sales and gross profits were derived from the
replacement, construction and installation (equipment, materials, plumbing,
electrical, etc.) of pools and landscaping.  This reflects a shift
toward more sales of maintenance and minor repair products due to the
significant declines in new pool construction over the past four
years.  Historically, just over 50% of our total sales and gross
profits were related to maintenance and repair products.





With our
acquisition of National Pool Tile (NPT) in 2008, our focus in 2009 included
expanding the number of sales center locations that offer NPT’s tile and
composite pool finish products.  Another recent example of our product
initiatives is the expansion of our replacement parts offerings.  This
includes the continued expansion of our Pool Corporation branded products, which
has contributed to our improvement of gross margin.


Complementary
product sales have also been an important factor in our historical base business
sales growth, but have declined over the past several years since the majority
of these products are related to construction activities or are discretionary by
nature.  We continue to identify other product categories that could
become part of our complementary product offerings in the future.  We
typically introduce two to three categories each year in certain
markets.  We then evaluate the performance of these test categories
and focus on those which we believe exhibit long-term growth
potential.  We intend to continue to expand our complementary products
initiative by increasing the number of locations which offer complementary
products, increasing the number of complementary products offered at certain
locations and continuing a modest broadening of the product offerings on a
company-wide basis.





Operating
Strategy





We
operate three distribution networks: the SCP network, the
Superior network and the Horizon network.  The SCP network
consists of 168 sales centers, including 12 sales centers in Europe, the
Superior network consists of 62 sales centers and the Horizon network consists
of 57 sales centers.  We distribute swimming pool supplies, equipment
and related leisure products through our SCP and Superior networks, and we
distribute irrigation and landscape products through our Horizon
network.


5


We
adopted the strategy of operating two distinct distribution networks within the
swimming pool marketplace primarily for two reasons:





1.
            To
      offer our customers a choice of different distributors, featuring
      distinctive product selections and service personnel;
  and





2.
            To
      increase the level of customer service and operational efficiency provided
      by the sales centers in each network by promoting healthy competition
      between the two networks.





We
evaluate our sales centers based upon their performance relative to
predetermined standards that include both financial and operational
measures.  Our corporate support groups provide our field operations
with various services including customer and vendor related programs,
information systems support and expert resources to help them achieve their
goals.  We believe our incentive programs and feedback tools, along
with the competitive nature of our internal networks, stimulate and enhance
employee performance.





Distribution





Our sales
centers are located near customer concentrations, typically in industrial,
commercial or mixed-use zones.  Customers may pick up products at any
sales center location, or products may be delivered via our trucks or third
party carriers.





Our sales
centers maintain well-stocked inventories to meet customers’ immediate
needs.  We utilize warehouse management technology to optimize
receiving, inventory control, picking, packing and shipping
functions.





We also
operate 10 centralized shipping locations that redistribute products we purchase
in bulk quantities to our sales centers or directly to customers.





Purchasing
and Suppliers





We enjoy
good relationships with our suppliers, who generally offer competitive pricing,
return policies and promotional allowances.  It is customary in our
industry for manufacturers to seasonally offer extended payment terms to
qualifying purchasers such as POOL. These terms are typically available to us
for pre-season or early season purchases.





We
initiated a preferred vendor program in 1999 which encourages our buyers to
purchase products from a smaller number of vendors.  We work closely
with these vendors to develop programs and services to better meet the needs of
our customers and to concentrate our purchasing activities.  These
practices, together with a more comprehensive service offering, have resulted in
improved margins at the sales center level.





We
regularly evaluate supplier relationships and consider alternate sourcing to
assure competitive cost, service and quality standards.  Our largest
suppliers include Pentair Corporation, Hayward Pool Products, Inc. and Zodiac
Pool Systems, Inc., which accounted for approximately 16%, 10% and 8%,
respectively, of the cost of products we sold in 2009.





Competition





Based on
industry knowledge and available data, management believes we are the largest
wholesale distributor of swimming pool and related backyard products and the
only truly national wholesale distributor focused on the swimming pool industry
in the United States.  We are also one of the top three distributors
of landscape and irrigation products in the United States, and we compete
against one national wholesale distributor of these products.  We face
intense competition from many regional and local distributors in our markets and
to a lesser extent, mass-market retailers and large pool supply retailers with
their own internal distribution networks.





Some
geographic markets we serve, particularly our four largest, higher density
markets in California, Florida, Texas and Arizona, are more competitive than
others.  Barriers to entry in our industry are relatively low. We
compete with other distributors for rights to distribute brand-name
products.  If we lose or are unable to obtain these rights, we might
be materially and adversely affected. We believe that the size of our operations
allows us to compete favorably for such distribution rights.






6





We
believe that the principal competitive factors in swimming pool and landscape
supply distribution are:





·
            the
      breadth and availability of products
offered;


·
            the quality and level of customer
service;


·
            the breadth and depth of sales and marketing
  programs;


·
            consistency and stability of business relationships with
      customers;


·
            competitive product pricing; and


·
            access to commercial credit to finance business working
      capital.





We
believe that we generally compete favorably with respect to each of these
factors.





Seasonality
and Weather





For a
discussion regarding seasonality and weather, see Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Seasonality and Quarterly Fluctuations,” of this Form 10-K.





Environmental,
Health and Safety Regulations





Our
business is subject to regulation under local fire codes and international,
federal, state and local environmental and health and safety requirements,
including regulation by the Environmental Protection Agency, the Consumer
Product Safety Commission, the Department of Transportation, the Occupational
Safety and Health Administration, the National Fire Protection Agency and the
International Maritime Organization. Most of these requirements govern the
packaging, labeling, handling, transportation, storage and sale of chemicals and
fertilizers. We store certain types of chemicals and/or fertilizers at each of
our sales centers and the storage of these items is strictly regulated by local
fire codes. In addition, we sell algaecides and pest control products that are
regulated as pesticides under the Federal Insecticide, Fungicide and Rodenticide
Act and various state pesticide laws. These laws are primarily related to
labeling, annual registration and licensing.





Employees





We
employed approximately 3,200 people at December 31, 2009. Given the seasonal
nature of our business, our peak employment period is the summer and depending
on expected sales levels, we add 200 to 500 employees to our work
force to meet seasonal demand.





Intellectual
Property





We
maintain both domestic and foreign registered trademarks primarily for our
private label products that are important to our current and future business
operations. We also own rights to several Internet domain names.





Geographic
Areas





Net sales
by geographic region were as follows for the past three fiscal years (in
thousands):





Year
      Ended December 31,2009
            
            
            2008
            
            
            2007United
      States
            $
            1,393,513
            
            $
            1,626,869
            
            $
            1,774,771International
            
            146,281
            
            
            156,814
            
            
            153,596$
            1,539,794
            
            $
            1,783,683
            
            $
            1,928,367





Net
property and equipment by geographic region was as follows (in
thousands):





December
      31,2009
            
            
            2008
            
            
            2007United
      States
            $
            27,840
            
            $
            28,931
            
            $
            30,505International
            
            3,592
            
            
            4,117
            
            
            3,718$
            31,432
            
            $
            33,048
            
            $
            34,223







7





Available
Information





Our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of
charge on our website at www.poolcorp.com as soon as reasonably practical after
we electronically file such reports with, or furnish them to, the Securities and
Exchange Commission.





Additionally,
we have adopted a Code of Business Conduct and Ethics, applicable to all
employees, officers and directors, which is available free of charge on our
website.





Item 1A.  Risk Factors





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 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.





Risk
Factors





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
demand for our swimming pool and related outdoor lifestyle products has been and
may continue to be adversely affected by unfavorable economic
conditions.





In
economic downturns, the demand for swimming pool or leisure related products may
decline as discretionary consumer spending, the growth rate of pool eligible
households and swimming pool construction decline.  Although maintenance
products and repair and replacement equipment that must be purchased by pool
owners to maintain existing swimming pools currently account for approximately
90% of our net sales and gross profits, the growth of this portion of our
business depends on the expansion of the installed pool base and could also be
adversely affected by decreases in construction activities similar to the trends
between late 2006 and 2009.  A weakening economy may also cause deferrals
of discretionary replacement and refurbish activity.  In addition,
even in generally favorable economic conditions, severe and/or prolonged
downturns in the housing market could have a material adverse impact on our
financial performance.  Such downturns expose us to certain additional
risks, including but not limited to the risk of customer closures or
bankruptcies, which could shrink our potential customer base and inhibit our
ability to collect on those customers’ receivables.





We
believe that homeowners’ access to consumer credit, particularly as facilitated
by mortgage-backed financing markets, is a critical enabling factor in the
purchase of new pool and irrigation systems.  The recent unfavorable
economic conditions and downturn in the housing market have resulted in
significant tightening of credit markets, which has limited the ability of
consumers to access financing for new swimming pool and irrigation
systems.  If these trends continue or worsen, many consumers will
likely not be able to obtain financing for pool and irrigation projects, which
could negatively impact our sales of construction related products.





8


We
are susceptible to adverse weather conditions.





Weather
is one of the principal external factors affecting our business.  For
example, unseasonably late warming trends in the spring or early cooling trends
in the fall can shorten the length of the pool season.  Also,
unseasonably cool weather or extraordinary rainfall during the peak season can
decrease swimming pool use, installation and maintenance, as well as landscape
installations and maintenance. These weather conditions adversely affect sales
of our products. Drought conditions or water management initiatives may lead to
municipal ordinances related to water use restrictions, which could result in
decreased pool and irrigation system installations and negatively impact our
sales.  While warmer weather conditions favorably impact our sales,
global warming trends and other significant climate changes can create more
variability in the short-term or lead to other unfavorable weather conditions
that could adversely impact our sales or operations.  For a discussion
regarding seasonality and weather, see Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Seasonality and
Quarterly Fluctuations,” of this Form 10-K.





Our
distribution business is highly dependent on our ability to maintain favorable
relationships with suppliers.





As a
distribution company, maintaining favorable relationships with our suppliers is
critical to the success of our business.  We believe that we add
considerable value to the swimming pool supply chain and landscape supply chain
by purchasing products from a large number of manufacturers and distributing the
products to a highly fragmented customer base on conditions that are more
favorable than these customers could obtain on their own.  We believe
that we currently enjoy good relationships with our suppliers, who generally
offer us competitive pricing, return policies and promotional
allowances.  However, our inability to maintain favorable
relationships with our suppliers could have an adverse effect on our
business.





Our
largest suppliers are Pentair Corporation, Hayward Pool Products, Inc. and
Zodiac Pool Systems, Inc., which accounted for approximately 16%, 10% and 8%,
respectively, of the costs of products we sold in 2009.  A decision by
several suppliers, acting in concert, to sell their products directly to retail
customers and other end-users of their products, bypassing distribution
companies like ours, would have an adverse effect on our
business.  Additionally, the loss of a single significant supplier due
to financial failure or a decision to sell exclusively to other distributors,
retail customers or end user consumers could also adversely affect our
business.  We dedicate significant resources to promote the benefits
and affordability of pool ownership, which we believe greatly benefits our
swimming pool customers and suppliers.





We
face intense competition both from within our industry and from other leisure
product alternatives.





We face
competition from both inside and outside of our industry.  Within our
industry, we compete against various regional and local distributors and, to a
lesser extent, mass market retailers and large pool or landscape supply
retailers.  Outside of our industry, we compete with sellers of other
leisure product alternatives, such as boats and motor homes, and with other
companies who rely on discretionary homeowner expenditures, such as home
remodelers.  New competitors may emerge as there are low barriers to
entry in our industry.  Some geographic markets that we serve,
particularly our four largest, higher density markets in California, Florida,
Texas and Arizona, representing approximately 51% of our net sales in 2009, also
tend to be more competitive than others.





More
aggressive competition by mass merchants and large pool or landscape supply
retailers could adversely affect our sales.





Mass market
retailers today carry a limited range of, and devote a limited amount of
shelf space to, merchandise and products targeted to our
industry.  Historically, mass market retailers
have generally expanded by adding new stores and product breadth, but their
product offering of pool and landscape related products has remained relatively
constant.  Should mass market retailers increase their focus on the
pool or professional landscape industries, or increase the breadth of their pool
and landscape related product offerings, they may become a more significant
competitor for direct and end-use customers which could have an adverse
impact on our business.  We may face additional competitive pressures
if large pool or landscape supply retailers look to expand their customer base
to compete more directly within the distribution channel.





9


We
depend on key personnel.





We
consider our employees to be the foundation for our growth and success. As such,
our future success depends in large part on our ability to attract, retain and
motivate qualified personnel, including our executive officers and key
management personnel. If we are unable to attract and retain key personnel, our
operating results could be adversely affected.





Past
growth may not be indicative of future growth.





Historically,
we have experienced substantial sales growth through acquisitions, market share
gains and new sales center openings that have increased our size, scope and
geographic distribution. During the past five fiscal years, we have opened 18
new sales centers (net of subsequent closings and consolidations of new sales
centers) and have completed 9 acquisitions. These acquisitions have added 74
sales centers (net of sales center closings and consolidations within one year
of acquisition) to our distribution networks. Between 2007 and 2009, we also
closed or consolidated 12 existing sales centers. While we contemplate continued
growth through acquisitions and internal expansion, no assurance can be made as
to our ability to:





·
            penetrate
      new markets;


·
            identify
      appropriate acquisition candidates;


·
            complete
      acquisitions on satisfactory terms and successfully integrate acquired
      businesses;


·
            obtain
      financing;


·
            generate
      sufficient cash flows to support expansion plans and general operating
      activities;


·
            maintain
      favorable supplier arrangements and relationships;
  and


·
            identify
      and divest assets which do not continue to create value consistent with
      our objectives.





If we do
not manage these potential difficulties successfully, our operating results
could be adversely affected.





The
growth of our business depends on effective marketing programs.





The
growth of our business depends on the expansion of the installed pool base.
Thus, an important part of our strategy is to promote the growth of the pool
industry through our extensive advertising and promotional programs that attempt
to raise consumer awareness regarding the benefits and affordability of pool
ownership, the ease of pool maintenance and the many ways in which a pool may be
enjoyed beyond swimming. These programs include media advertising, website
development such as www.swimmingpool.comTM
and public relations campaigns. We believe these programs benefit the entire
supply chain from our suppliers to our customers.





We also
promote the growth of our customers’ businesses through comprehensive support
programs that offer promotional tools and marketing support to help generate
increased sales for our customers. Our programs include such features as
personalized websites, brochures, marketing campaigns and business development
training. We also provide certain retail store customers with assistance in site
selection, store layout and design and business management system
implementation. Our inability to sufficiently develop effective advertising,
marketing and promotional programs to succeed in a weakened economic environment
and an increasingly competitive marketplace, in which we (and our entire supply
chain) also compete with other luxury product alternatives, could have a
material adverse effect on our business.





Our
business is highly seasonal.





In 2009,
approximately 67% of our net sales and over 100% of our operating income were
generated in the second and third quarters of the year, which represent the peak
months of swimming pool use, installation, remodeling and repair. Our sales are
substantially lower during the first and fourth quarters of the year, when we
may incur net losses.





The
nature of our business subjects us to compliance with environmental, health,
transportation and safety regulations.





We are
subject to regulation under federal, state and local environmental, health,
transportation and safety requirements, which govern such things as packaging,
labeling, handling, transportation, storage and sale of chemicals and
fertilizers. For example, we sell algaecides and pest control products that are
regulated as pesticides under the Federal Insecticide, Fungicide and Rodenticide
Act and various state pesticide laws. These laws are primarily related to
labeling, annual registration and licensing.






10





Failure
to comply with these laws and regulations may result in the assessment of
administrative, civil and criminal penalties or the imposition of injunctive
relief. Moreover, compliance with such laws and regulations in the future could
prove to be costly, and there can be no assurance that we will not incur such
costs in material amounts. These laws and regulations have changed substantially
and rapidly over the last 20 years and we anticipate that there will be
continuing changes. The clear trend in environmental, health, transportation and
safety regulation is to place more restrictions and limitations on activities
that impact the environment, such as the use and handling of chemical
substances. Increasingly, strict restrictions and limitations have resulted in
higher operating costs for us and it is possible that the costs of compliance
with such laws and regulations will continue to increase. We will attempt to
anticipate future regulatory requirements that might be imposed and we will plan
accordingly to remain in compliance with changing regulations and to minimize
the costs of such compliance.





We
store chemicals, fertilizers and other combustible materials that involve fire,
safety and casualty risks.





We store
chemicals and fertilizers, including certain combustible, oxidizing compounds,
at our sales centers. A fire, explosion or flood affecting one of our facilities
could give rise to fire, safety and casualty losses and related liability
claims. We maintain what we believe is prudent insurance protection. However, we
cannot guarantee that our insurance coverage will be adequate to cover future
claims that may arise or that we will be able to maintain adequate insurance in
the future at rates we consider reasonable. Successful claims for which we are
not fully insured may adversely affect our working capital and profitability. In
addition, changes in the insurance industry have generally led to higher
insurance costs and decreased availability of coverage.





We
conduct business internationally, which exposes us to additional
risks.





Our
international operations expose us to certain additional risks,
including:





·
            difficulty
      in staffing international subsidiary
operations;


·
            different
      political and regulatory
conditions;


·
            currency
      fluctuations;


·
            adverse
      tax consequences; and


·
            dependence
      on other economies.





We source
certain products we sell, including our Pool Corporation branded products, from
Asia and other international sources. There is a greater risk that we may not be
able to access products in a timely and efficient manner, and we may also be
subject to certain trade restrictions that prevent us from obtaining products.
Fluctuations in other factors relating to international trade, such as tariffs,
currency exchange rates, transportation costs and inflation are additional risks
for our international operations.





A
terrorist attack or the threat of a terrorist attack could have a material
adverse effect on our business.





Discretionary
spending on leisure product offerings such as ours is generally adversely
affected during times of economic or political uncertainty. The potential for
terrorist attacks, the national and international responses to terrorist
attacks, and other acts of war or hostility could create these types of
uncertainties and negatively impact our business for the short or long-term in
ways that cannot presently be predicted.





Item 1B.  Unresolved Staff Comments





None.





11


Item 2.  Properties





We lease
the POOL corporate offices, which consist of approximately 50,000 square feet of
office space in Covington, Louisiana, from an entity in which we have a 50%
ownership interest. We own three sales center facilities in Florida and one in
Texas. We lease all of our other properties and the majority of our leases have
three to seven year terms. As of December 31, 2009, we had 18 leases with
remaining terms longer than seven years that expire between 2017 and 2027. Most
of our leases contain renewal options, some of which involve rent increases. In
addition to minimum rental payments, which are set at competitive rates, certain
leases require reimbursement for taxes, maintenance and insurance.





Our sales
centers range in size from approximately 2,000 square feet to 100,000 square
feet and generally consist of warehouse, counter, display and office space. Our
centralized shipping locations (CSLs) range in size from 16,000 square feet to
78,000 square feet.





We
believe that our facilities are well maintained, suitable for our business and
occupy sufficient space to meet our operating needs. As part of our normal
business, we regularly evaluate sales center performance and site suitability
and may relocate a sales center or consolidate two locations if a sales center
is redundant in a market, under performing or otherwise deemed unsuitable. We do
not believe that any single lease is material to our operations.





The table
below summarizes the changes in our sales centers duringthe year ended
December 31, 2009:





Network
            
            12/31/08
            
            New
              Locations
            
            Consolidated
              &
      Closed
              Locations (1)
            
            Acquired
              Locations
      (2)
            
            Converted
      Locations (3)
            
            12/31/09SCP
            
            146
            
            -
            
            (1
            )
            -
            
            2
            
            147Superior
            
            60
            
            -
            
            (3
            )
            7
            
            (2
            )
            62Horizon
            
            61
            
            -
            
            (4
            )
            -
            
            -
            
            57Total
      Domestic
            
            267
            
            -
            
            (8
            )
            7
            
            -
            
            266SCP
      International
            
            21
            
            -
            
            -
            
            -
            
            -
            
            21Total
            
            288
            
            -
            
            (8
            )
            7
            
            -
            
            287





(1)
            Consolidated
      sales centers are those locations where we expect to transfer the majority
      of the existing business to our nearby sales center locations. During
      2009, we consolidated seven sales centers and closed one sales
      center.


(2)
            We
      added 10 sales centers through our acquisition of General Pool & Spa
      Supply (GPS) in October 2009.  We have consolidated three of
      these locations with existing sales
centers.


(3)
            In
      2009, we converted two existing sales centers in Florida from our Superior
      network to our SCP network.





12


The table
below identifies the number of sales centers in each state or country by
distribution network as of December 31, 2009:





Location
            
            SCP
            Superior
            Horizon
            
            TotalUnited
      StatesCalifornia
            
            24
            21
            20
            
            65Florida
            
            31
            6
            -
            
            37Texas
            
            16
            4
            11
            
            31Arizona
            
            6
            4
            10
            
            20Georgia
            
            7
            2
            -
            
            9Tennessee
            
            4
            3
            -
            
            7Washington
            
            1
            -
            6
            
            7Alabama
            
            4
            2
            -
            
            6Nevada
            
            2
            2
            2
            
            6New
      York
            
            6
            -
            -
            
            6Louisiana
            
            5
            -
            -
            
            5New
      Jersey
            
            3
            2
            -
            
            5Ohio
            
            2
            3
            -
            
            5Pennsylvania
            
            4
            1
            -
            
            5Colorado
            
            1
            1
            2
            
            4Illinois
            
            3
            1
            -
            
            4Indiana
            
            2
            2
            -
            
            4Missouri
            
            3
            1
            -
            
            4North
      Carolina
            
            3
            1
            -
            
            4Oklahoma
            
            2
            1
            -
            
            3Oregon
            
            -
            -
            3
            
            3South
      Carolina
            
            2
            1
            -
            
            3Virginia
            
            2
            1
            -
            
            3Arkansas
            
            2
            -
            -
            
            2Idaho
            
            -
            -
            2
            
            2Massachusetts
            
            2
            -
            -
            
            2Michigan
            
            2
            -
            -
            
            2Minnesota
            
            1
            1
            -
            
            2Connecticut
            
            1
            -
            -
            
            1Iowa
            
            1
            -
            -
            
            1Kansas
            
            1
            -
            -
            
            1Kentucky
            
            -
            1
            -
            
            1Maryland
            
            1
            -
            -
            
            1Mississippi
            
            1
            -
            -
            
            1Nebraska
            
            1
            -
            -
            
            1New
      Mexico
            
            1
            -
            -
            
            1Utah
            
            -
            -
            1
            
            1Wisconsin
            
            -
            1
            -
            
            1Total
      United States
            
            147
            62
            57
            
            266InternationalCanada
            
            8
            -
            -
            
            8France
            
            5
            -
            -
            
            5Portugal
            
            3
            -
            -
            
            3United
      Kingdom
            
            2
            -
            -
            
            2Italy
            
            1
            -
            -
            
            1Spain
            
            1
            -
            -
            
            1Mexico
            
            1
            -
            -
            
            1Total
      International
            
            21
            -
            -
            
            21Total
            
            168
            62
            57
            
            287





13


Item 3.  Legal Proceedings





From time
to time, we are subject to various claims and litigation arising in the ordinary
course of business, including product liability, personal injury, commercial,
contract and employment matters.  While the outcome of any litigation is
inherently unpredictable, we do not believe, based on currently available facts,
that the ultimate resolution of any of these matters will have a material
adverse impact on our financial condition, results of operations or cash
flows.





PART II.





Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities





Our
common stock is traded on the NASDAQ Global Select Market under the symbol
“POOL”.  On February 19, 2010, there were approximately
11,831 holders of record of our common stock.  The table below sets
forth the high and low sales prices of our common stock as well as dividends
declared for each quarter during the last two fiscal years.





DividendsHigh
            
            
            Low
            
            DeclaredFiscal
      2009First
      Quarter
            
            $
            19.00
            
            $
            11.39
            
            $
            0.13Second
      Quarter
            
            
            18.47
            
            
            13.58
            
            
            0.13Third
      Quarter
            
            
            24.57
            
            
            15.79
            
            
            0.13Fourth
      Quarter
            
            
            23.62
            
            
            17.75
            
            
            0.13Fiscal
      2008First
      Quarter
            
            $
            24.64
            
            $
            17.99
            
            $
            0.12Second
      Quarter
            
            
            22.43
            
            
            17.76
            
            
            0.13Third
      Quarter
            
            
            25.87
            
            
            16.65
            
            
            0.13Fourth
      Quarter
            
            
            23.39
            
            
            13.36
            
            
            0.13





We
initiated quarterly dividend payments to our shareholders in the second quarter
of 2004 and we have continued payments in each subsequent quarter. Our Board of
Directors (our Board) has increased the dividend amount five times including in
the fourth quarter of 2004 and annually in the second quarter of 2005 through
2008. Future dividend payments will be at the discretion of our Board, after
considering various factors, including our earnings, capital requirements,
financial position, contractual restrictions and other relevant business
considerations. We cannot assure shareholders or potential investors that
dividends will be declared or paid any time in the future if our Board
determines that there is a better use of those funds.





Stock
Performance Graph





The
information included under the caption “Stock Performance Graph” in this
Item 5 of this Annual Report on Form 10-K is not deemed to be
“soliciting material” or to be “filed” with the SEC or subject to Regulation 14A
or 14C under the Securities Exchange Act of 1934 (the 1934 Act) or to the
liabilities of Section 18 of the 1934 Act, and will not be deemed to
be incorporated by reference into any filing under the Securities Act of 1933 or
the 1934 Act, except to the extent we specifically incorporate it by
reference into such a filing.





The graph
below compares the total stockholder return on our common stock for the last
five fiscal years with the total return on the NASDAQ US Index and the S&P
MidCap 400 Index for the same period, in each case assuming the investment of
$100 on December 31, 2004 and the reinvestment of all dividends. We believe the
S&P MidCap 400 Index includes companies with capitalization comparable to
ours. Additionally, we chose the S&P MidCap 400 Index for comparison, as
opposed to an industry index, because we do not believe that we can reasonably
identify a peer group or a published industry or line-of-business index that
contains companies in a similar line of business.






14











Base
            INDEXED
      RETURNSPeriod
            Years
      EndingCompany
      / Index
            12/31/04
            12/31/05
            12/31/06
            12/31/07
            12/31/08
            12/31/09Pool
      Corporation
            100
            117.77
            125.16
            64.33
            59.80
            65.41S&P
      MidCap 400 Index
            100
            112.56
            124.17
            134.08
            85.50
            117.46NASDAQ
      US Index
            100
            101.33
            114.01
            123.71
            73.11
            105.61




Purchases
of Equity Securities





The table
below summarizes the repurchases of our common stock in the fourth quarter of
2009.





Period
            
            Total
      numberof shares
      purchased(1)
            
            Average
      pricepaid per
      share
            
            Total
      number of sharespurchased as
      part of  publiclyannounced plan(2)
            
            Maximum
      approximatedollar value that
      may yet bepurchased under the
      plan(3)October
      1-31, 2009
            
            -
            
            $
            -
            
            -
            
            $
            52,987,067November
      1-30, 2009
            
            -
            
            $
            -
            
            -
            
            $
            52,987,067December
      1-31, 2009
            
            -
            
            $
            -
            
            -
            
            $
            52,987,067Total
            
            -
            
            $
            -
            
            -





(1)
            These
      shares may include shares of our common stock surrendered to us by
      employees in order to satisfy tax withholding obligations in connection
      with certain exercises of employee stock options and/or the exercise price
      of such options granted under our share-based compensation
      plans.  There were no shares surrendered for this purpose in the
      fourth quarter of 2009.


(2)
            In
      July 2002, our Board authorized $50.0 million for the repurchase of
      shares of our common stock in the open market. In August 2004, November
      2005 and August 2006, our Board increased the authorization for the
      repurchase of shares of our common stock in the open market to a total of
      $50.0 million from the amounts remaining at each of those dates. In
      November 2006 and August 2007, our Board increased the authorization for
      the repurchase of shares of our common stock in the open market to a total
      of $100.0 million from the amounts remaining at each of those
      dates.


(3)
            In
      2009, we did not purchase any shares under our Board authorized
      plan.  As of February 22, 2010, $53.0 million of the authorized
      amount remained available.






15


Item
6.Selected
Financial Data





The table
below sets forth selected financial data from the Consolidated Financial
Statements. You should read this information in conjunction with the discussions
in Item 7 of this Form 10-K and with the Consolidated Financial Statements and
accompanying Notes in Item 8 of this Form 10-K.





Year
      Ended December 31, (1)(in
      thousands, except per share data)
            
            
            2009(2)
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005(3)Statement
      of Income DataNet
      sales
            
            $
            1,539,794
            
            $
            1,783,683
            
            $
            1,928,367
            
            $
            1,909,762
            
            $
            1,552,659Operating
      income
            
            
            88,440
            
            
            115,476
            
            
            133,774
            
            
            167,382
            
            
            135,363Net
      income
            
            
            19,202
            
            
            56,956
            
            
            69,394
            
            
            95,024
            
            
            80,455Earnings
      per share:Basic
            
            $
            0.39
            
            $
            1.19
            
            $
            1.42
            
            $
            1.83
            
            $
            1.53Diluted
            
            $
            0.39
            
            $
            1.17
            (4)
            $
            1.37
            
            $
            1.74
            
            $
            1.44
            (4)Cash
      dividends declaredper
      common share
            
            $
            0.52
            
            $
            0.51
            
            $
            0.465
            
            $
            0.405
            
            $
            0.34Balance Sheet Data(5)Working
      capital
            
            $
            230,804
            
            $
            294,552
            
            $
            250,849
            
            $
            227,631
            
            $
            193,525Total
      assets
            
            
            743,099
            
            
            830,906
            
            
            814,854
            
            
            774,562
            
            
            740,850Total
      long-term debt,including
      current portion
            
            
            248,700
            
            
            307,000
            
            
            282,525
            
            
            191,157
            
            
            129,100Stockholders'
      equity(6)
            
            
            252,187
            
            
            241,734
            
            
            208,791
            
            
            277,684
            
            
            281,724OtherBase
      business sales change(7)
            
            
            (15
            )%
            
            (9
            )%
            
            (1
            )%
            
            10
            %
            
            14
            %Number
      of sales centers
            
            
            287
            
            
            288
            
            
            281
            
            
            274
            
            
            246





(1)
            During
      the years 2005 to 2009, we successfully completed 9 acquisitions
      consisting of 74 sales centers. For information about our recent
      acquisitions, see Note 2 of “Notes to Consolidated Financial
      Statements,” included in Item 8 of this Form 10-K.  Our results
      were negatively impacted between 2007 and 2009 due to the adverse external
      market conditions, which included downturns in the housing market and
      overall economy that led to significant declines in pool and irrigation
      construction activities and deferred discretionary replacement purchases
      by consumers.





(2)
            The
      2009 net income and earnings per share amounts include the impact of a
      $26.5 million equity loss that we recognized in September 2009
      related to our pro rata share of Latham Acquisition Corporation’s (LAC)
      non-cash goodwill and other intangible asset impairment
      charge.  The impact of this impairment charge was a $0.54 per
      share decrease in diluted earnings per share compared to
      2008.  The recognized loss resulted in the full write-off of our
      equity method investment in LAC.  For additional information
      about our equity method investment in LAC, see Note 1 of “Notes to
      Consolidated Financial Statements,” included in Item 8 of this Form
      10-K.





(3)
            As adjusted to reflect the impact of share-based
      compensation expense related to the adoption of Accounting Standards
      Codification 718, Compensation – Stock
      Compensation,using the modified retrospective transition
  method.





(4)
            As
      adjusted for the adoption of ASC 260-10-45-61A, which resulted in a $0.01
      decrease in our diluted earnings per share for 2008 and 2005 due to
      rounding.  For additional
      information, see Note 1 of “Notes to Consolidated Financial
      Statements,” included in Item 8 of this Form
      10-K.





(5)
            The
      2005 balance sheet data has been adjusted to correct the classification of
      our deferred tax balances.





(6)
            In
      June 2006, the Financial Accounting Standards Board (FASB) issued guidance
      for accounting for uncertainty in income taxes. The beginning
      stockholders’ equity balance in 2007 reflected a reduction to retained
      earnings of approximately $0.5 million related to the implementation
      of this guidance.





(7)
            For
      a discussion regarding our calculation of base business sales, see Item 7,
      “Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - RESULTS OF OPERATIONS,” of this
      Form 10-K.


16


Item
7.Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





2009
FINANCIAL OVERVIEW





Financial
Results





We
believe our 2009 financial results reflect our ability to capitalize on our
financial and operational strengths and provide evidence of our resiliency given
the most difficult external market environment ever faced by our
industry.  We achieved many of our 2009 objectives by focusing on
disciplined pricing and purchasing strategies (driving record gross margin),
rebalancing inventories and improving working capital management (leading to
record cash from operations) and controlling costs relative to our current
sales levels.  We believe that we realized continued market share
gains, which we attribute to our high service levels coupled with growth
initiatives that included the expansion of product category offerings in tile
and replacement parts.





Net sales
decreased 14% compared to 2008 due to a 15% decline in base business sales,
which reflects the prolonged impact of lower pool and irrigation construction
activity, greater deferred discretionary replacement activity and unfavorable
weather and currency fluctuations.  These reductions were partially
offset by an increase in certain maintenance and repair product sales,
inflationary price increases that we passed through the supply chain and sales
for new drains and related safety products as a result of the Virginia Graeme
Baker Pool and Spa Safety Act (VGB Act).  For a discussion of our base
business calculation, see the RESULTS OF OPERATIONS section below.





Gross
profit as a percentage of net sales (gross margin) increased 30 basis points to
29.2% in 2009 as favorable shifts in product mix and continued improvements in
margin management practices helped offset negative pressures from the
competitive pricing environment.





Selling
and administrative expenses (operating expenses) for 2009 decreased 10% compared
to 2008.  This decrease reflects the impact of cost control
initiatives, including lower payroll related, variable and discretionary
expenses, and reduced delivery and vehicle operating costs. These results
include $1.4 million of non-cash charges in the second half of 2009 related
to the closure and consolidation of certain sales centers between September and
December 2009.





Operating
income declined 23% to $88.4 million in 2009, while operating income as a
percentage of net sales (operating margin) decreased to 5.7% in 2009 compared to
6.4% in 2008.  Interest expense, net declined $9.2 million
compared to 2008 due primarily to a 41% decrease in interest expense and
$1.8 million of foreign currency transaction gains.





As we
reported in our third quarter 2009 results, we recognized a $26.5 million
equity loss related to our pro rata share of Latham Acquisition Corporation’s
(LAC) non-cash goodwill and other intangible asset impairment
charge.  Since our pro-rata share of this charge exceeded the
$26.5 million recorded value of our investment in LAC as of
September 1, 2009, the recognized loss reflected the full write-off of
the investment.  Prior to this, we had recognized an equity loss of
$2.2 million related to our share of LAC’s loss from ongoing operations for
the eight months ended August 2009.  In total, we recognized an
equity loss of $28.7 million for LAC in 2009.  This compares to
an equity loss of $1.7 million recognized in fiscal 2008.  LAC
filed for bankruptcy in December 2009 and its Plan of Reorganization was
approved by the United States Bankruptcy Court for the District of Delaware in
January 2010, allowing it to emerge from bankruptcy.  As of the
date of the approval, we no longer have an equity interest in LAC and will not
recognize any impact related to LAC’s future earnings or losses.  We
did not recognize any tax benefits related to the write-down of our equity
investment in LAC.





Earnings
per share for 2009 was $0.39 per diluted share on net income of
$19.2 million, compared to earnings per share of $1.17 per diluted share on
net income of $57.0 million in 2008.  The $0.78 decrease in
diluted earnings per share includes a decline of approximately $0.59 per diluted
share related to our equity investment in LAC, $0.54 of which is related to our
pro-rata share of LAC’s impairment charge.





17


Financial
Position and Liquidity





Cash
provided by operations increased $20.0 million to $113.3 million in
2009.  In January 2009, we paid $30.0 million for our
deferred third and fourth quarter 2008 federal income tax
payments.  We also paid $26.0 million in 2009 for our third and
fourth quarter 2009 estimated taxes.  Excluding this
$56.0 million combined impact of timing differences related to 2008 and
2009 estimated federal income tax payments, cash from operations improved
$76.0 million in 2009.  This improvement is due to our focused
management of working capital and reflects the decrease in inventory discussed
below.  Cash provided by operations helped fund the following in
2009:




·
              $10.9 million
      for acquisitions, including our acquisition of General Pool & Spa
      Supply (GPS) in October 2009;
 ·
              debt
      repayments of $79.1 million, which helped lower our borrowing
      costs;
 ·
              quarterly
      cash dividend payments to shareholders, which totaled $25.3 million
      for the year; and
 ·
              capital
      expenditures of $7.2
million.
  Total net
receivables decreased 17% to $96.4 million at December 31, 2009
from $115.6 million at December 31, 2008 due to the lower sales, a
shift toward more cash sales as a result of tighter credit terms and a
$2.3 million decrease in the allowance for doubtful accounts, which
reflects 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 to 34.9 days at
December 31, 2009 from 36.3 days at
December 31, 2008.





Our
inventory levels decreased 12% to $355.5 million as of
December 31, 2009 compared to $405.9 million as of
December 31, 2008.  Excluding approximately
$8.0 million of inventory related to the acquisition of GPS, inventories
declined 14% year over year due to the success of our inventory rebalancing
efforts and the decrease in sales. Our inventory turns, as calculated on a
trailing twelve month basis, slowed to 3.0 times as of
December 31, 2009 compared to 3.1 times as of
December 31, 2008.





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 have
been weak, including declines in Gross Domestic Product (GDP) during the first
nine months of 2009 and high unemployment rates.  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
      between 2006 and 2009, the proportion of our net sales represented by
      maintenance, repair and replacement (MRR) products has increased from over
      60% 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:





2009
            
            2008
            
            2007
            
            2006Estimated
      new units
            45,000
            
            90,000
            
            150,000
            
            200,000Unit
      decrease
            (45,000
            )
            (60,000
            )
            (50,000
            )
            (10,000
            )%
      change from prior year units
            (50
            )%
            (40
            )%
            (25
            )%
            (5
            )%








18




Since
these trends worsened from 2006 through 2009, they had a more pronounced impact
on our results in 2008 and 2009.  However, as evidenced by moderating
base business sales declines throughout 2009 in Florida, California and Arizona
(including some month over month sales growth and essentially flat fourth
quarter sales in Florida compared to the same periods in 2008), we believe these
trends have begun to level off in certain major pool markets first impacted by
the housing market downturn.





OUTLOOK





Our key
2010 objectives are consistent with 2009 and include the following:





·
            realizing
      market share growth;


·
            managing
      purchasing and pricing strategies to maximize gross
  margin;


·
            tightly
      controlling expenses and working capital relative to sales levels;
      and


·
            maximizing
      cash flow generation to reduce
debt.





While we
believe that the level of declines in new construction activity peaked in 2009,
we expect the ongoing housing market and general economic downturns will
continue to pressure new pool and irrigation construction activity in
2010.  However, we anticipate a relatively stable maintenance market
based on the increased installed based of swimming pools and the potential for
higher replacement and refurbish activity due to recent pent-up demand caused by
consumer’s decisions to defer discretionary purchases.  We expect that
sales levels relative to 2009 will be
lower in the first quarter of 2010, but should gradually improve throughout
the remainder of the year with comparatively higher sales levels anticipated in
the second half of 2010.  The first half of 2009 included
approximately $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), and we do not expect any significant sales activity related to the
VGB Act in 2010.


In 2010, we do not
anticipate any inflationary product cost increases.  Given the
competitive pricing environment and the favorable impact to gross margin in the
first half of 2009based on our volume inventory purchases ahead of
vendor price increases in the second half of 2008, we believe gross margin could
drop off modestly in the first half of 2010.  However, we expect gross
margin will be essentially flat for the full year compared to 2009.





While we
continue to drive targeted expense reductions, the rate of these decreases
should continue to moderate throughout 2010 as we lap more of the impact of cost
measures implemented in 2009.  In 2010, we expect interest expense
will continue to decline based on lower projected average
borrowings.  Excluding any acquisition activity, we plan to open two
new sales centers in 2010.





Based on
current trends including the unfavorable weather conditions during the first two
months of 2010, we project that 2010 earnings per share will be in the range of
$1.00 to $1.15 per diluted share.  This range includes our expectation
for a higher seasonal loss per diluted share in the first quarter of 2010
compared to the same period in 2009, with gradually improving year on year
comparisons as 2010 progresses.  The lower end of this range assumes
earnings results consistent with fiscal 2009, but includes the comparative
benefits from lower expected interest expense, the projected accretive impact of
the GPS acquisition of approximately $0.02 per diluted share and the fact that
there will be no impact from LAC since we no longer have an equity interest in
LAC as of January 2010.





We expect
cash provided by operations will approximate net income for fiscal 2010, but
will be comparatively lower than 2009 because we will not realize the same level
of improvements from our ongoing working capital management
initiatives.





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 Item 1A of this Form 10-K.





19


CRITICAL
ACCOUNTING ESTIMATES





We
prepare our Consolidated Financial Statements in accordance with U.S. generally
accepted accounting principles (GAAP), which requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Management identifies critical accounting estimates as:





·
            those
      that require the use of assumptions about matters that are inherently and
      highly uncertain at the time the estimates are made;
  and


·
            those
      for which changes in the estimate or assumptions, or the use of different
      estimates and assumptions, could have a material impact on our
      consolidated results of operations or financial
  condition.





Management
has discussed the development, selection and disclosure of our critical
accounting estimates with the Audit Committee of our Board. We believe the
following critical accounting estimates require us to make the most difficult,
subjective or complex judgments.





Allowance
for Doubtful Accounts





We
maintain an allowance for doubtful accounts for an estimate of the losses we
will incur if our customers do not make required payments. We perform periodic
credit evaluations of our customers and typically do not require collateral.
Consistent with industry practices, we generally require payment from our
customers within 30 days except for sales under early buy programs for which we
provide extended payment terms to qualified customers. The extended terms
usually require payments in equal installments in April, May and June or May and
June, depending on geographic location. Credit losses have generally been within
or better than our expectations.





As our
business is seasonal, our customers’ businesses are also seasonal. Sales are
lowest in the winter months and our past due accounts receivable balance as a
percentage of total receivables generally increases during this time. We provide
reserves for uncollectible accounts based on the accounts receivable aging
ranging from 0.1% for amounts currently due up to 100% for specific accounts
more than 60 days past due.





At the
end of each quarter, we perform a reserve analysis of all accounts with past due
balances greater than $20,000. Additionally, we perform a separate reserve
analysis on the balance of our accounts receivables with emphasis on the
remainder of the past due portion of the aging. As we review these past due
accounts, we evaluate collectibility based on a combination of factors,
including:





·
            aging
      statistics and trends;


·
            customer
      payment history;


·
            independent
      credit reports; and


·
            discussions
      with customers.





During
the year, we write off account balances when we have exhausted reasonable
collection efforts and determined that the likelihood of collection is remote.
Such write-offs are charged against our allowance for doubtful accounts. In the
past five years, write-offs have averaged approximately 0.2% of net sales
annually.  However, write-offs as a percentage of net sales was 0.4%
in 2009 and 0.3% in 2008, reflecting a trend related to the negative impacts on
some of our customer’s businesses due to the difficult external
environment.





If the
balance of the accounts receivable reserve increased or decreased by 20% at
December 31, 2009, pretax income would change by approximately
$2.3 million and earnings per share would change by approximately $0.03 per
diluted share based on the number of diluted shares outstanding at
December 31, 2009.





20


Inventory
Obsolescence





Product
inventories represent the largest asset on our balance sheet. Our goal is to
manage our inventory such that we minimize stock-outs to provide the highest
level of service to our customers. To do this, we maintain at each sales center
an adequate inventory of stock keeping units (SKUs) with the highest sales
volume. At the same time, we continuously strive to better manage our slower
moving classes of inventory, which are not as critical to our customers and
thus, inherently have lower velocity. Sales centers classify products into 13
classes based on sales at that location over the past 12 months. All inventory
is included in these classes, except for non-stock special order items and
products with less than 12 months of usage. The table below presents a
description of these inventory classes:





Class
      0
            new
      products with less than 12 months usageClasses
      1-4
            highest
      sales value items, which represent approximately 80% of net sales at the
      sales centerClasses
      5-12
            lower
      sales value items, which we keep in stock to provide a high level of
      customer serviceClass
      13
            products
      with no sales for the past 12 months at the local sales center level,
      excluding special order
      products not yet delivered to the customerNull
      class
            non-stock
      special order items





There is
little risk of obsolescence for products in classes 1-4 because products in
these classes generally turn quickly. We establish our reserve for inventory
obsolescence based on inventory classes 5-13, which we believe represent some
exposure to inventory obsolescence, with particular emphasis on SKUs with the
least sales over the previous 12 months. The reserve is intended to reflect
the value of inventory that we may not be able to sell at a profit. We provide a
reserve of 5% for inventory in classes 5-13 and non-stock inventory as
determined at the sales center level. We also provide an additional 5% reserve
for excess inventory in classes 5-12 and an additional 45% reserve for excess
inventory in class 13. We determine excess inventory, which is defined as the
amount of inventory on hand in excess of the previous 12 months usage, on a
company-wide basis.  We also evaluate whether the calculated reserve
provides sufficient coverage of the total Class 13 inventory.





In
evaluating the adequacy of our reserve for inventory obsolescence, we consider a
combination of factors including:





·
            the
      level of inventory in relationship to historical sales by product,
      including inventory usage by class based on product sales at both the
      sales center and Company levels;


·
            changes
      in customer preferences or regulatory
  requirements;


·
            seasonal
      fluctuations in inventory levels;


·
            geographic
      location; and


·
            new
      product offerings.





We
periodically adjust our reserve for inventory obsolescence as changes occur in
the above-identified factors.





If the
balance of our inventory reserve increased or decreased by 20% at
December 31, 2009, pretax income would change by approximately
$1.6 million and earnings per share would change by approximately $0.02 per
diluted share based on the number of diluted shares outstanding at
December 31, 2009.





Vendor
Incentives





We
account for vendor incentives in accordance with Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) 605-50-25-10, Customer’s Accounting for Certain
Consideration Received from a Vendor.Many of our vendor arrangements
provide for us to receive incentives of specified amounts of consideration when
we achieve any of a number of measures. These measures are generally related to
the volume level of purchases from our vendors and may include negotiated
pricing arrangements. We account for vendor incentives as if they are a
reduction of the prices of the vendor’s products and therefore a reduction of
inventory until we sell the product, at which time such incentives are
recognized as a reduction of cost of sales in our income
statement.


21


Throughout
the year, we estimate the amount of the incentive earned based on our estimate
of cumulative purchases for the fiscal year relative to the purchase levels that
mark our progress toward earning the incentives. We accrue vendor incentives on
a monthly basis using these estimates provided that we determine they are
probable and reasonably estimable. Our estimates for cumulative purchases and
sales of qualifying products are driven by our sales projections, which can be
significantly impacted by a number of external factors including weather and
changes in economic conditions. Changes in our purchasing mix also impact our
incentive estimates, as incentive rates can vary depending on our volume of
purchases from specific vendors. We continually revise these estimates
throughout the year to reflect actual purchase levels and identifiable trends.
As a result, our estimated quarterly vendor incentive accruals may include
cumulative catch-up adjustments to reflect any changes in our estimates between
reporting periods.





If market
conditions were to change, vendors may change the terms of some or all of these
programs. Although such changes would not affect the amounts we have recorded
related to products already purchased, they may lower or raise our gross margins
for products purchased and sold in future periods.





Income
Taxes





We record
deferred tax assets or liabilities based on differences between the financial
reporting and tax basis of assets and liabilities using currently enacted rates
and laws that will be in effect when we expect the differences to reverse. Due
to changing tax laws and state income tax rates, significant judgment is
required to estimate the effective tax rate expected to apply to tax differences
that are expected to reverse in the future.





As of
December 31, 2009, and in accordance with the provisions of ASC 740, Income Taxes, United States
taxes were not provided on undistributed earnings of our foreign subsidiaries,
as we have invested or expect to invest the undistributed earnings indefinitely.
If in the future these earnings are repatriated to the United States, or if we
determine that the earnings will be remitted in the foreseeable future,
additional tax provisions may be required.





We hold,
through our wholly owned affiliates, cash balances in the countries in which we
operate, including amounts held outside the United States. Most of the amounts
held outside the United States could be repatriated to the United States, but,
under current law, may be subject to United States federal income taxes, less
applicable foreign tax credits. Repatriation of some foreign balances is
restricted by local laws including the imposition of withholding taxes in some
jurisdictions.





We have
operations in 38 states and 7 foreign countries. The amount of income taxes we
pay is subject to adjustment by the applicable tax authorities. We are subject
to regular audits by federal, state and foreign tax authorities. Our estimate
for the potential outcome of any uncertain tax issue is highly judgmental. We
believe we have adequately provided for any reasonably foreseeable outcome
related to these matters. However, our future results may include favorable or
unfavorable adjustments to our estimated tax liabilities in the period the
assessments are made or resolved or when statutes of limitation on potential
assessments expire. These adjustments may include changes in valuation
allowances that we have established. As a result of these uncertainties, our
total income tax provision may fluctuate on a quarterly basis.





Incentive
Compensation Accrual





We have
an incentive compensation structure designed to attract, motivate and retain
employees. Our incentive compensation packages include bonus plans that are
specific to each group of eligible participants and their levels and areas of
responsibility. The majority of our bonus plans have annual cash payments that
are based primarily on objective performance criteria, with a component based on
management’s discretion. We calculate bonuses as a percentage of salaries based
on the achievement of certain key measurable financial and operational results,
including budgeted operating income and diluted earnings per share. We generally
make bonus payments at the end of February following the most recently completed
fiscal year.





Management
sets the objectives for our bonus plans at the beginning of the bonus plan year
using both historical information and forecasted results of operations for the
current plan year. The Compensation Committee of our Board approves these
objectives for certain bonus plans. We record an incentive compensation accrual
at the end of each month using management’s estimate of the total overall
incentives earned based on the amount of progress achieved towards the stated
bonus plan objectives. During the third and fourth quarters and as of our fiscal
year end, we adjust our estimated incentive compensation accrual based on our
detailed analysis of each bonus plan, the participants’ progress toward
achievement of their specific objectives and management’s estimates related to
the discretionary components of the bonus plans.





22





Our
estimated quarterly incentive compensation expense and accrual balances may vary
relative to actual annual bonus expense and payouts due to the
following:





·
            the
      discretionary components of the bonus
plans;


·
            the
      timing of the approval and payment of the annual bonuses;
    and


·
            our
      projections related to achievement of multiple year performance objectives
      for our Strategic Plan Incentive
Program.





Impairment
of Goodwill and Equity Method Investments





Goodwill





Our
largest intangible asset is goodwill. At December 31, 2009, our
goodwill balance was $176.9 million, representing 24% of total assets.
Goodwill represents the excess of the amount we paid to acquire a company over
the estimated fair value of tangible assets and identifiable intangible assets
acquired, less liabilities assumed.





We
account for goodwill under the provisions of ASC 350-20, Goodwill. Under these rules,
we test goodwill for impairment annually or on a more frequent basis if events
or changes in circumstances occur that indicate potential impairment. If the
estimated fair value of any of our reporting units has fallen below their
carrying value, we compare the estimated fair value of the reporting units’
goodwill to its carrying value. If the carrying value of a reporting units’
goodwill exceeds its estimated fair value, we recognize the difference as an
impairment loss in operating income.  Since we define our operating
segment as an individual sales center and we do not have operations below the
sales center level, our reporting unit is an individual sales
center.





In
September 2009, we closed one of our Horizon sales centers in
Texas.  As a result, we performed an interim impairment test to
determine the implied fair value of this reporting unit’s
goodwill.  Since the implied fair value of goodwill was less than the
carrying value, we wrote off $0.3 million of goodwill related to this
reporting unit.  This impairment expense is recorded in selling and
administrative expenses on the Consolidated Statements of Income.





In
October 2009, we performed our annual goodwill impairment test.  As of
October 1, 2009, we had 203 reporting units with allocated goodwill
balances.  The highest goodwill balance is $7.1 million for our
UK reporting unit.  For the other reporting units, the highest
goodwill balance is $5.7 million and the average goodwill balance is
$0.8 million.  We estimate the fair value of our reporting units
by utilizing a fair value model, which requires us to make several assumptions
about projected future cash flows, discount rates and multiples.  In
order to determine the reasonableness of the assumptions included in our fair
value estimates, we compare the total estimated fair value for all aggregated
reporting units to our market capitalization on the date of our impairment
test.  We also review for potential impairment indicators at the
reporting unit level based on an evaluation of recent historical operating
trends, current and projected local market conditions and other relevant factors
as appropriate.  Based on our annual goodwill impairment test, we
determined that the goodwill attributed to all of our reporting units is not
impaired.





If our
assumptions or estimates in our fair value calculations change, we could incur
impairment charges in future periods which would decrease operating income and
result in lower asset values on our balance sheet.  For example, we
performed a sensitivity test for the two key assumptions in our annual goodwill
impairment test and determined that an increase in our estimated weighted
average cost of capital of 50 basis points or a decrease in the estimated
perpetuity growth rate of 1% could have resulted in the estimated fair value of
four reporting units falling below their carrying values.  The
calculated goodwill impairment based on this sensitivity test was approximately
$0.6 million combined for all four reporting units.  Overall, we
believe that our reporting units most at risk for goodwill impairment include
the UK, Spain and one New Jersey location based on the combination of their
higher goodwill balances and 2009 operating results at approximately break even
levels due to the impacts of the current adverse external market
environment.





23


Equity
Method Investments




As of
December 31, 2009, we had two equity method investments, consisting of
our 38% investment in Latham Acquisition Corporation (LAC) and our 50%
investment in Northpark Corporate Center.  We account for these
investments in accordance with ASC 323, Investments-Equity Method and Joint
Ventures.





We
evaluate our equity method investments for potential impairment indicators on an
ongoing basis.  This evaluation requires the exercise of judgment
based upon the specific facts and circumstances of each investment.  A
series of actual operating losses or projected future losses of an investee or
other factors may indicate a decrease in value of the investment.  If
impairment indicators exist, we will evaluate whether the impairment is
other-than-temporary.  Impairment is measured by comparing the
investment carrying amount to the estimated fair value of the
investment.





As of
December 31, 2008, the carrying value of our investments was
$31.2 million, including $30.1 million for LAC.  Based on the
fact that LAC’s results had deteriorated due to external market conditions
(including a net loss in 2008) and our expectations for a continued difficult
environment in 2009, we considered other relevant facts and circumstances to
determine whether there was an indicator of a decrease in the value of our
investment as of December 31, 2008 and, if so, whether it reflected an
other-than-temporary impairment.  In evaluating the value of our
investment in LAC, we considered the following:




·
            the
      challenging industry environment, which had a negative impact on LAC’s
      2008 results;


·
            expectations
      for LAC’s near-term and long-term results based primarily on LAC’s market
      position and financial projections (including projections used by LAC in
      its annual impairment test, which determined that there was no impairment
      of its goodwill and other intangible balances as of December 31,
      2008);


·
            the
      anticipated timeframe for LAC’s return to profitability;
    and


·
            LAC’s
      current financial condition, including its ability to meet working capital
      needs.





Using the
criteria listed above, we determined that there was no impairment of our equity
method investments as of December 31, 2008.





In 2009,
LAC had a net loss for the six months ended June 2009 as its second quarter net
income was not enough to offset its first quarter seasonal loss.  As
of June 30, 2009, we determined that there were no significant changes
in LAC’s long-term financial projections or the other factors we consider in
performing our evaluation for indicators of a potential decrease in the value of
our investments that may result in other-than-temporary
impairments.





In the
third quarter of 2009, LAC identified indicators of impairment based on an
evaluation of its future capital requirements that required it to perform an
interim impairment assessment of its goodwill and other intangible
assets.  On September 1, 2009, LACrecorded a non-cash
impairment charge based on its interim impairment test.  Since our pro
rata share of this impairment charge exceeded our equity investment balance, we
recognized a $26.5 million equity loss equal to our equity investment balance as
of September 1, 2009, reducing the value of our investment in LAC to
zero.  In December 2009, LAC filed for bankruptcy and its Plan of
Reorganization was approved by the United States Bankruptcy Court for the
District of Delaware in January 2010, allowing it to emerge from
bankruptcy.  As of January 2010, we no longer have an equity interest
in LAC and will not recognize any impact related to LAC’s future earnings or
losses.





Recent
Accounting Pronouncements





For
information about recent accounting pronouncements, see Note 1 of “Notes to
Consolidated Financial Statements,” included in Item 8 of this Form
10-K.


24


RESULTS
OF OPERATIONS





The table
below summarizes information derived from our Consolidated Statements of Income
expressed as a percentage of net sales for the past three fiscal
years:





Year
      Ended December 31,2009
            
            
            2008
            
            
            2007Net
      sales
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
      of sales
            70.8
            
            
            71.1
            
            
            72.5Gross
      profit
            29.2
            
            
            28.9
            
            
            27.5Operating
      expenses
            23.5
            
            
            22.4
            
            
            20.6Operating
      income
            5.7
            
            
            6.4
            
            
            6.9Interest
      expense, net
            0.6
            
            
            1.1
            
            
            1.1Income
      before income taxes and equity earnings (loss)
            5.1
            
            
            5.4
            
            
            5.8





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





Our
discussion of consolidated operating results includes the operating results from
acquisitions in 2009, 2008 and 2007.  We have included the results of
operations in our consolidated results since the respective acquisition
dates.





Fiscal
Year 2009 compared to Fiscal Year 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)
            
            Year
      Ended
            Year
      Ended
            
            Year
      EndedDecember
      31,
            December
      31,
            
            December
      31,2009
            
            2008
            
            2009
            
            2008
            
            
            2009
            
            2008Net
      sales
            $
            1,482,686
            $
            1,737,465
            $
            57,108
            $
            46,218
            
            $
            1,539,794
            $
            1,783,683Gross
      profit
            
            434,264
            
            501,019
            
            15,460
            
            14,209
            
            
            449,724
            
            515,228Gross
      margin
            
            29.3
            %
            28.8
            %
            27.1
            %
            30.7
            %
            
            29.2
            %
            28.9
            %Operating
      expenses
            
            345,591
            
            385,280
            
            15,693
            
            14,472
            
            
            361,284
            
            399,752Expenses
      as a % of net sales
            
            23.3
            %
            22.2
            %
            27.5
            %
            31.3
            %
            
            23.5
            %
            22.4
            %Operating
      income (loss)
            
            88,673
            
            115,739
            
            (233
            )
            (263
            )
            
            88,440
            
            115,476Operating
      margin
            
            6.0
            %
            6.7
            %
            (0.4
            )%
            (0.6
            )%
            
            5.7
            %
            6.4
            %





25


We have
excluded the following acquisitions from base business for the periods
identified:





Acquired
            
            Acquisition
              Date
            
            Net
              Sales
      Centers Acquired
            
            Period
              ExcludedGeneral
      Pool & Spa Supply (GPS) (1)
            
            October
      2009
            
            7
            
            October–December
      2009Proplas
      Plasticos, S.L. (Proplas)
            
            November
      2008
            
            0
            
            January–December
      2009 andNovember–December
      2008National
      Pool Tile Group, Inc. (NPT) (2)
            
            March
      2008
            
            8
            
            January–May
      2009 and March–May 2008Canswim
      Pools
            
            March
      2008
            
            1
            
            January–May
      2009 and March–May 2008





(1)
            We acquired 10 GPS sales centers
      and have consolidated 3 of these with existing sales centers as of
      December 31, 2009.


(2)
            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 (parenthetical numbers for each category indicate the number of sales
centers excluded as of December 31, 2009):





·
            acquired
      sales centers (7, net of consolidations – see table
  above);


·
            existing
      sales centers consolidated with acquired sales centers
  (1);


·
            closed
      sales centers (5, including 1 in
2009);


·
            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 (0).





Since we
divested our pool liner manufacturing operation in France at the beginning of
April 2008, we also excluded these operations from base business for the
comparative three month period ended March 31, 2008.





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 2009:





December
      31, 2008
            288Acquired,
      net of consolidations
            7Consolidated
            (7
            )Closed
            (1
            )December
      31, 2009
            287





For
information about our recent acquisitions, see Note 2 of “Notes to Consolidated
Financial Statements,” included in Item 8 of this Form 10-K.





Net
Sales





Year
      Ended December 31,(in
      millions)
            
            
            2009
            
            
            2008
            
            
            ChangeNet
      sales
            
            $
            1,539.8
            
            $
            1,783.7
            
            $
            (243.9)
            (14
            )%





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 the mortgage-backed financing markets.  Coupled with the severely
depressed economic environment in 2009, 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.






26





Base
business sales decreased 15% compared to 2008, including 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.  Overall, weather conditions were
unfavorable compared to the same period in 2008 (see discussion of significant
weather impacts under the heading Seasonality and Quarterly
Fluctuations beginning on page 32). 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 3% to 4% that we passed
      through the supply chain;


·
            higher
      sales of certain maintenance and repair products due to both price
      inflation and market share growth, including a 6% increase in chemical
      sales and a 2% increase in total parts product
  sales;


·
            a
      net increase of approximately $13.0 million in sales for new drains
      and related safety products as a result of the 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 (an increase of over
      $17.0 million for the first nine months of 2009 was offset by a
      decrease of over $4.0 million in the fourth quarter of 2009 compared
      to the same period in 2008);


·
            approximately
      $7.0 million in first quarter sales related to our 2008 acquisitions;
      and


·
            $4.7
      million in fourth quarter sales related to our 2009
      acquisition.





Our sales
growth for MRR products was primarily due to the following:





·
            the
      continued successful execution of our sales, marketing and service
      programs, which we believe have resulted in market share
      gains;


·
            higher
      sales of non-discretionary products due to the increased installed base of
      swimming pools, which we estimate grew approximately 1% in 2009;
      and


·
            price
      increases (as mentioned above).





Gross
Profit





Year
      Ended December 31,(in
      millions)
            
            
            2009
            
            
            2008
            
            
            ChangeGross
      profit
            
            $
            449.7
            
            $
            515.2
            
            $
            (65.5)
            (13
            )%Gross
      margin
            
            
            29.2
            %
            
            28.9
            %





In 2009,
gross margin increased 30 basis points compared to 2008 as a shift in sales mix
to products in the higher margin maintenance and repair market and specific
margin improvement initiatives helped offset the adverse impact on gross margins
due to the tough competitive pricing environment.  Gross margin increased 60
basis points in the first half of 2009, but was flat in the second half of
2009.  For the year,favorable impacts compared to 2008
included the following (listed in order of estimated magnitude):





·
            benefits
      recognized in the first half of 2009 resulting from pre-price increase
      inventory purchases made in the second half of 2008 (with gross margin up
      120 basis points in the first quarter of 2009 and up 30 basis points in
      the second quarter of 2009 compared to the same periods in
      2008);


·
            increased
      sales of preferred vendor and Pool Corporation private label products;
      and


·
            lower
      freight expenses on product purchases due to lower fuel
    costs.





27


Operating
Expenses





Year
      Ended December 31,(in
      millions)
            
            
            2009
            
            
            2008
            
            
            ChangeOperating
      expenses
            
            $
            361.3
            
            $
            399.8
            
            $
            (38.5)
            (10
            )%Operating
      expenses as a percentage of net sales
            
            
            23.5
            %
            
            22.4
            %





The
decrease in operating expenses reflects a 10% decline in base business operating
expenses due primarily to the impact of our cost control initiatives including
lower payroll related, variable and discretionary expenses.  Average
monthly total headcount in 2009 decreased 10% compared to 2008, driving a 9%
decline in total labor and related costs.  Total delivery expenses
declined 25%, reflecting lower delivery volumes and decreases in both vehicle
operating expenses (including lower fuel costs) and vehicle rental
expenses.  Most discretionary expenses declined compared to 2008,
including a $2.1 million decrease in advertising costs.  Bad debt
expense also decreased $5.2 million as the rate of customer payment issues
has fallen after peaking at the end of the 2008 season.





The
decrease in base business operating expenses was partially offset by the impact
of our acquired sales centers.  During the first quarter of 2009 we
realized approximately $2.0 million in operating expenses related to our
2008 acquisitions and we incurred $1.5 million of operating expenses in the
fourth quarter of 2009 related to our acquisition of GPS.  Despite the
decrease in headcount, employee insurance costs increased $1.6 million
compared to 2008 due primarily to several high dollar claims in the fourth
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, net declined $9.2 million compared to 2008 due primarily to a 41%
decrease in interest expense and $1.8 million of foreign currency
transaction gains.  Interest expense declined due to a 17% lower
average outstanding debt balance and a decrease in the weighted average
effective interest rate to 3.4% in 2009 from 4.8% 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% at
December 31, 2009 and 39.26% at
December 31, 2008.





Net
Income and Earnings Per Share





Net
income decreased to $19.2 million in 2009 compared to $57.0 million in
2008.  Earnings per share for 2009 decreased to $0.39 per diluted
share compared to $1.17 in 2008.  The $0.78 decrease in diluted
earnings per share reflects the $0.54 per diluted share impact of LAC’s
impairment charge included in the reported equity loss for 2009.  The
dilutive impact of our fourth quarter 2009 acquisition was approximately $0.01
per diluted share for 2009.







28


Fiscal
Year 2008 compared to Fiscal Year 2007





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)
            
            Year
      Ended
            Year
      Ended
            
            Year
      EndedDecember
      31,
            December
      31,
            
            December
      31,2008
            
            2007
            
            2008
            
            2007
            
            
            2008
            
            2007Net
      sales
            $
            1,696,848
            $
            1,873,359
            $
            86,835
            $
            55,008
            
            $
            1,783,683
            $
            1,928,367Gross
      profit
            
            488,502
            
            517,157
            
            26,726
            
            13,489
            
            
            515,228
            
            530,646Gross
      margin
            
            28.8
            %
            27.6
            %
            30.8
            %
            24.5
            %
            
            28.9
            %
            27.5
            %Operating
      expenses
            
            370,658
            
            382,230
            
            29,094
            
            14,642
            
            
            399,752
            
            396,872Expenses
      as a % of net sales
            
            21.8
            %
            20.4
            %
            33.5
            %
            26.6
            %
            
            22.4
            %
            20.6
            %Operating
      income (loss)
            
            117,844
            
            134,927
            
            (2,368
            )
            (1,153
            )
            
            115,476
            
            133,774Operating
      margin
            
            6.9
            %
            7.2
            %
            (2.7
            )%
            (2.1
            )%
            
            6.4
            %
            6.9
            %





For an
explanation of how we calculate base business, please refer to the discussion of
base business on page 27 under the heading “Fiscal Year 2009 compared to Fiscal
Year 2008”.





For
purposes of comparing operating results for the year ended
December 31, 2008 to the year ended December 31, 2007, we
have excluded acquired sales centers from base business for the periods
identified in the table below.  As of December 31, 2008, we
also excluded seven existing sales centers consolidated with acquired sales
centers, four closed sales centers and one consolidated sales center from base
business.  In addition to the 22 total sales centers excluded from
base business as of December 31, 2008, there were two sales centers opened
in new markets that were excluded from January to May 2008 before they
became base business sales centers in June 2008.  Since we
divested our pool liner manufacturing operation in France in April 2008, we
also excluded these operations from base business for the comparative nine month
period ended December 31, 2007.





Acquired
            
            Acquisition
              Date
            
            Net
              Sales
      Centers Acquired
            
            Period
              ExcludedProplas
      Plasticos, S.L.(1)
            
            November
      2008
            
            0
            
            November
      and December 2008NPT
      (2)
            
            March
      2008
            
            9
            
            March–December
      2008Canswim
      Pools
            
            March
      2008
            
            1
            
            March–December
      2008Tor-Lyn,
      Limited
            
            February
      2007
            
            1
            
            February
      – April 2007 and January – April
2008





The table
below summarizes the changes in our sales centers during 2008:





December
      31, 2007
            281Acquired,
      net of consolidations (2)
            10New
      locations
            1Consolidated
            (2
            )Closed
            (2
            )December
      31, 2008
            288





We
acquired a single location in Spain and consolidated it with our existing Madrid
sales center operations.


We
acquired 15 NPT sales centers and consolidated 6 of these with existing sales
centers in 2008, including 4 in March 2008 and 2 in the second quarter of
2008.





For
information about our 2008 and 2007 acquisitions, see Note 2 of “Notes to
Consolidated Financial Statements,” included in Item 8 of this Form
10-K.


29


Net
Sales





Year
      Ended December 31,(in
      millions)
            
            
            2008
            
            
            2007
            
            
            ChangeNet
      sales
            
            $
            1,783.7
            
            $
            1,928.4
            
            $
            144.7
            (8)
            %





During
2008, new pool and irrigation construction markets continued to face
unprecedented adverse conditions created by the combination of significant
declines in the real estate and mortgage-backed financing markets.  As a
result, our 2008 sales were negatively impacted with a more profound effect on
pool and irrigation construction product sales.  The decrease in net sales
was more pronounced in our seasonally slow fourth quarter, declining 14%
compared to the same period in 2007 as the economy worsened and consumers began
to defer more discretionary repair and replacement purchases.





Base
business sales decreased 9% compared to 2007, including an 8% decline on the
swimming pool side of the business and an 18% decrease on the irrigation side of
the business.  This impact was more concentrated in markets that had
the greatest run-up in real estate values between 2000 and 2006, which includes
a number of our larger markets in Florida, Arizona and parts of
California.  The decline in new pool construction negatively impacted
complementary product sales, which decreased 15% compared to 2007. 
Overall, weather conditions were unfavorable compared to the same period in
2007.





The
overall decrease in net sales was partially offset by increases due to the
following:





·
            approximately
      $47.0 million in sales related to our 2008
    acquisitions;


·
            moderate
      sales growth for MRR products, including a 5% increase in chemical
      sales;


·
            estimated
      average price increases of 2% to 4% that we passed through the supply
      chain;


·
            higher
      freight out income of $3.3 million due to the implementation of fuel
      surcharges, which offset the increase in outbound freight costs;
      and


·
            2%
      sales growth for our International operations due primarily to favorable
      currency fluctuations.





Our sales
growth for MRR products was primarily due to the following:





·
            the
      continued successful execution of our sales, marketing and service
      programs, which we believe have resulted in market share
      gains;


·
            higher
      sales of non-discretionary products due to the increased installed base of
      swimming pools, which we estimate grew approximately 2% to 3% in 2007;
      and


·
            price
      increases (as mentioned above).





Gross
Profit





Year
      Ended December 31,(in
      millions)
            
            
            2008
            
            
            2007
            
            
            ChangeGross
      profit
            
            $
            515.2
            
            $
            530.6
            
            $
            (15.4)
            (3)
            %Gross
      margin
            
            
            28.9
            %
            
            27.5
            %





Despite
the tough competitive pricing environment, gross margin increased 140 basis
points compared to 2007.The increase in gross
margin is primarily attributable to our focus on pricing discipline at the sales
center level.  Other favorable impacts compared to 2007 included the
following (listed in order of estimated magnitude):





·
            increased
      sales of preferred vendor and Pool Corporation private label
      products;


·
            greater
      margin contribution from our acquisition of
NPT;


·
            a
      shift in sales mix to products in the higher margin maintenance
      market;


·
            benefits
      to our fourth quarter gross margin resulting from pre-price increase
      inventory purchases (increase of 130 to 150 basis points in the fourth
      quarter and approximately 20 basis points for fiscal 2008);
      and


·
            a
      favorable comparison to 2007, which was more negatively impacted by
      competitive pricing due to other distributors selling off excess
      inventories.








30





Operating
Expenses





Year
      Ended December 31,(in
      millions)
            
            
            2008
            
            
            2007
            
            
            ChangeOperating
      expenses
            
            $
            399.8
            
            $
            396.9
            
            $
            2.9
            1
            %Operating
      expenses as a percentage of net sales
            
            
            22.4
            %
            
            20.6
            %





The
increase in operating expenses was due to approximately $14.5 million of
operating expenses related to our 2008 acquisitions, which was partially offset
by a 3% decrease in base business operating expenses compared to
2007.  The impact of cost control initiatives offset higher building
rental expenses of $2.6 million (primarily for sales centers opened or
expanded during 2007), an increase in bad debt expense of $2.2 million, higher
product delivery costs and inflationary increases in wages and other
costs.  Total operating expenses as a percentage of net sales
increased between periods due to the decrease in net sales.





Our cost
control initiatives include tighter management of discretionary costs, the
consolidation or closing of nine sales centers since November 2007 and selective
personnel reductions over the past year.  Despite the 6% reduction in
headcount year over year (excluding acquisitions), we still reduced overtime and
temporary labor costs by $4.5 million.  Compared to 2007, incentive
expenses declined $3.8 million and employee insurance costs also decreased
due primarily to lower claims expense.





Interest
Expense





Interest
expense, net decreased 15% between periods as the impact of a decrease in our
weighted average effective interest rate for the period more than offset our
higher average debt outstanding balance.  Average debt outstanding was 3%
higher for the year ended 2008, reflecting our increased borrowings during the
first half of 2008 that funded our March 2008 acquisitions.  The weighted
average effective interest rate decreased to 4.8% in 2008 from 6.0% in
2007.





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 39.26% at
December 31, 2008 and 38.66% at December 31, 2007.  The
increase in the effective income tax rate reflects a valuation allowance
established for annual losses from certain foreign operations.





Net
Income and Earnings Per Share





Net
income decreased 18% to $57.0 million in 2008.  Earnings per share for 2008
(as adjusted in 2009 for the adoption of ASC 260-10-45-61A) decreased to
$1.17 per diluted share compared to $1.37 in 2007.  The dilutive
impact of our first quarter acquisitions was approximately $0.02 per diluted
share for 2008.  In both periods, earnings per share benefited from
the reduction of our weighted average shares outstanding due to the impact of
our 2007 share repurchase activities.  This included an accretive
impact of approximately $0.02 in 2008 and $0.01 in 2007.





31


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. In 2009, approximately 67% of our net sales and over 100% of
our operating income were generated in the second and third quarters of the
year.





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 we made in the first six months of 2009 to take
advantage of pre-price increase inventory purchases and early payment discounts
offered by certain vendors.





The
following table presents certain unaudited quarterly data for 2009 and 2008. We
have included income statement and balance sheet data for the most recent eight
quarters to allow for a meaningful comparison of the seasonal fluctuations in
these amounts. 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 the swimming pool industry, the results of any one
or more quarters are not necessarily a good indication of results for an entire
fiscal year or of continuing trends.


(Unaudited)
                
                QUARTER(in
      thousands)
                
                2009
                
                2008First
                
                Second
                
                Third
                
                Fourth
                
                First
                
                Second
                
                Third
                
                FourthStatement
      of Income DataNet
      sales
                $
                276,626
                $
                602,082
                $
                430,054
                $
                231,032
                $
                338,215
                $
                692,972
                $
                493,530
                $
                258,966Gross
      profit
                
                81,193
                
                178,068
                
                123,394
                
                67,069
                
                95,354
                
                202,752
                
                141,800
                
                75,322Operating
      income (loss)
                
                (3,646
                )
                81,720
                
                32,142
                
                (21,776
                )
                2,197
                
                89,990
                
                38,617
                
                (15,328
                )Net
      income (loss)
                
                (6,236
                )
                48,366
                
                (9,322
                )
                (13,606
                )
                (3,184
                )
                52,875
                
                22,060
                
                (14,795
                )Net
      sales as a % of annual netsales
                
                18
                %
                39
                %
                28
                %
                15
                %
                19
                %
                39
                %
                28
                %
                15
                %Gross
      profit as a % of annualgross
      profit
                
                18
                %
                40
                %
                27
                %
                15
                %
                19
                %
                39
                %
                28
                %
                15
                %Operating
      income (loss) as a%
      of annual operating income
                
                (4
                )%
                92
                %
                36
                %
                (25
                )%
                2
                %
                78
                %
                33
                %
                (13
                )%Balance
      Sheet DataTotal
      receivables, net
                $
                160,318
                $
                233,288
                $
                149,733
                $
                96,364
                $
                206,187
                $
                278,654
                $
                178,927
                $
                115,584Product
      inventories, net
                
                397,863
                
                325,198
                
                318,177
                
                355,528
                
                476,758
                
                385,258
                
                345,944
                
                405,914Accounts
      payable
                
                201,300
                
                194,004
                
                137,761
                
                178,391
                
                333,104
                
                193,663
                
                128,329
                
                173,688Total
      debt
                
                381,221
                
                334,015
                
                273,300
                
                248,700
                
                396,110
                
                441,992
                
                337,742
                
                327,792
  Note:  Due to rounding, the sum of quarterly percentage amounts may
not equal 100%.





We expect
that our quarterly results of operations will continue to fluctuate depending on
the timing and amount of revenue contributed by new and acquired sales
centers.  Based on our peak summer selling season, we generally open
new sales centers and close or consolidate sales centers, when warranted, either
in the first quarter before the peak selling season starts or in the fourth
quarter after the peak selling season ends.





32


Weather
is one of the principal external factors affecting our business. The table below
presents some of the possible effects resulting from various weather
conditions.




Weather
            
            Possible
      EffectsHot
      and dry
            •
            Increased
      purchases of chemicals and suppliesfor
      existing swimming pools•
            Increased
      purchases of above-ground pools andirrigation
      productsUnseasonably
      cool weather or extraordinary
      amounts of rain
            •
            Fewer
      pool and landscape installations•
            Decreased
      purchases of chemicals and supplies•
            Decreased
      purchases of impulse items such asabove-ground
      pools and accessoriesUnseasonably
      early warming trends in spring/late cooling trends in fall
            •
            A
      longer pool and landscape season, thus increasing our
  sales(primarily
      in the northern half of the US)Unseasonably
      late warming trends in spring/early cooling trends in fall
            •
            A
      shorter pool and landscape season, thus decreasing our
    sales(primarily
      in the northern half of the US)




While
weather conditions in the first quarter of 2009 were generally favorable
compared to the same period last year, we did not realize any positive impact on
sales given the overriding adverse economic environment.  Unfavorable
weather delayed the start of the pool season in both 2008 and 2009 in a number
of our markets, with the 2009 season adversely impacted in most markets by much
colder than normal temperatures in April.  Throughout the second
quarter of 2009, weather conditions were unfavorable overall and adversely
impacted sales due to cold and wet conditions in the Midwest and
Northeast.  The Southwest also experienced unseasonably cool and wet
weather during June.  Our third quarter 2009 sales were also
negatively impacted due to much colder than normal temperatures that shortened
the pool season in most Central and Northern markets and higher than normal
rainfall in the South Central United States.  Consistent with the third
quarter of 2008, weather conditions were favorable in the Western U.S. and
Florida due to warmer than average temperatures.  However, near record
precipitation across most of the Central and Southeast regions and much colder
than average temperatures in the western half of the United States negatively
impacted our fourth quarter sales.





In the
first half of 2008, our sales benefited from more favorable weather in Texas and
Oklahoma compared to the same period in 2007 (see discussion
below).  However, our sales were negatively impacted in 2008 by
generally unfavorable weather conditions including cooler temperatures and
higher precipitation nationally compared to 2007.  The start of the
2008 pool season was delayed even further than in 2007 due to several late
winter storms in the Midwest and Northeast and much cooler March temperatures
across most of the country.  Cooler than normal temperatures in August
and September also shortened the pool season in 2008 for most North American
markets excluding the West Coast, while a number of severe tropical systems
adversely impacted our sales in Texas, Florida and Louisiana during the third
quarter of 2008.





In 2007,
our sales were negatively impacted by extended winter conditions that delayed
the start of the pool season in the Northeast compared to 2006, much cooler and
unusually wet weather conditions in Texas and Oklahoma during the first seven
months of 2007 (which had a significant impact on sales related to pool and
landscape construction) and less than ideal conditions in the third quarter,
which compared unfavorably to the same period in 2006.





33


LIQUIDITY
AND CAPITAL RESOURCES





Liquidity
is defined as the ability to generate adequate amounts of cash to meet
short-term and long-term cash needs. We assess our liquidity in terms of our
ability to generate cash to fund our operating activities, taking into
consideration the seasonal nature of our business. Significant factors which
could affect our liquidity include the following:





·
            cash
      flows generated from operating
activities;


·
            the
      adequacy of available bank lines of
credit;


·
            acquisitions;


·
            dividend
      payments;


·
            capital
      expenditures;


·
            the
      timing and extent of share repurchases;
and


·
            the
      ability to attract long-term capital with satisfactory
    terms.





Our
primary capital needs are seasonal working capital obligations and other general
corporate purposes, including acquisitions, dividend payments and share
repurchases. Our primary sources of working capital are cash from operations
supplemented by bank borrowings, which combined with seller financing have
historically been sufficient to support our growth and finance acquisitions. The
same principle applies to funds used for share repurchases and capital
expenditures.





We
prioritize our use of cash based on investing in our business, maintaining a
prudent debt structure and returning money to our shareholders. Our specific
priorities for the use of cash are as follows:





·
            maintenance
      and new sales center capital expenditures, which has averaged
      approximately 0.5% to 0.75% of net sales historically but was below and at
      the bottom of this range the past two years due to lower capacity
      expansion;


·
            strategic
      acquisitions executed
opportunistically;


·
            payment
      of cash dividends as and when declared by the Board;
  and


·
            repayment
      of debt.





While we
still have our Board authorized share repurchase program in place with
$53.0 million of the current authorized amount remaining available as of
December 31, 2009, this is not a current priority for the use of
cash.





Sources
and Uses of Cash





The
following table summarizes our cash flows (in thousands):





Year
      Ended December 31,2009
            
            
            2008
            
            
            2007Operating
      activities
            $
            113,250
            
            $
            93,282
            
            $
            71,644Investing
      activities
            
            (18,105
            )
            
            (41,304
            )
            
            (12,638
            )Financing
      activities
            
            (99,344
            )
            
            (44,726
            )
            
            (63,957
            )





Cash
provided by operations increased $20.0 million to $113.3 million in 2009
compared to 2008.  In January 2009, we paid $30.0 million
for our deferred third and fourth quarter 2008 federal income tax
payments.  We also paid $26.0 million in 2009 for our third and
fourth quarter 2009 estimated taxes.  Cash from operations improved
$76.0 million in 2009 excluding this $56.0 million combined impact of
timing differences related to our 2008 and 2009 estimated federal income tax
payments.  This improvement is due to our focused management of
working capital and reflects the significant decrease in
inventory.  The reduction of cash used in investing activities is due
to comparatively lower cash paid for acquisitions.  Net payments on
long-term debt of $79.1 million exceeded last year’s net payments by
approximately $56.0 million, driving the increase in cash used in financing
activities.





Cash
provided by operations in 2008 increased $21.6 million compared to 2007 due
primarily to the favorable impact from the reduction in outstanding accounts
receivable.  Our 2008 cash provided by operating activities also
reflects the benefit related to our $30.0 million deferred third and fourth
quarter 2008 estimated federal tax payments as allowed by the Internal Revenue
Service (IRS) for taxpayers affected by Hurricane Gustav.  This
benefit was offset by a negative impact of approximately $36.0 million
related to the net purchase and payment of inventory we purchased ahead of
vendor price increases.  In 2008, the increase in cash used in
investing activities reflects cash paid for our March 2008 acquisitions
partially offset by a decrease in capital expenditures.  Cash used in
financing activities in 2008 includes $23.1 million of net payments on
debt.








34





Future
Sources and Uses of Cash





Our
unsecured syndicated senior credit facility (the Credit Facility) provides for
$300.0 million in borrowing capacity including a $240.0 million
five-year revolving credit facility (the Revolver) and a term loan (the Term
Loan) with an original principal amount of $60.0 million.





At
December 31, 2009, there was $100.7 million outstanding and
$138.5 million available for borrowing under the Revolver.  The
Revolver matures on December 20, 2012.  The weighted average
effective interest rate on the Revolver was approximately 1.9% for the year
ended December 31, 2009.  In April 2009, we entered into an
interest rate swap agreement to reduce our future exposure to fluctuations in
interest rates on the Revolver.  This swap agreement will convert the
Revolver’s variable interest rate to a fixed rate of 1.725% on a notional amount
of $50.0 million.  The swap has an effective date of January 27,
2010 and will terminate on January 27, 2012.





At
December 31, 2009, there was $48.0 million outstanding under the Term
Loan.  We have remaining principal payments on the Term Loan of
$12.0 million per quarter in 2010 and we intend to fund these payments by
using cash provided by operations and borrowings under our
Revolver.  Our current interest rate swap agreement reduces our
exposure to fluctuations in interest rates for the remaining outstanding period
of the Term Loan by converting our variable rate to a fixed rate
basis.  This swap will terminate when the Term Loan matures on
December 20, 2010.  The weighted average effective interest
rate on the Term Loan was approximately 3.2% for the year ended December
31, 2009.





The
Credit Facility includes sublimits for the issuance of swingline loans and
standby letters of credit.  Pursuant to an accordion feature, the
aggregate maximum principal amount of the commitments under the Revolver may be
increased at our request and with agreement by the lenders, by up to
$75.0 million, to a total of $315.0 million.





On
February 12, 2007, we issued and sold $100.0 million aggregate
principal amount of Floating Rate Senior Notes (the Notes) in a private
placement offering pursuant to a Note Purchase Agreement. The Notes are due
February 12, 2012 and accrue interest on the unpaid principal balance
at a floating rate equal to a spread of 0.600% over the three-month LIBOR, as
adjusted from time to time. In February 2007, we entered into an interest
rate swap agreement to reduce our exposure to fluctuations in interest rates on
the Notes. The swap agreement converts the Notes’ variable interest rate to a
fixed rate of 5.088% on the initial notional amount of $100.0 million,
which decreased to a notional amount of $50.0 million in February
2010.  The effective interest rate on the Notes was approximately
5.688% for the year ended December 31, 2009.





Financial
covenants on our Credit Facility and Notes are closely aligned and include a
minimum fixed charge coverage ratio and maintenance of a maximum total leverage
ratio, which are our most restrictive financial covenants.  As of
December 31, 2009, the calculations of these two covenants are
detailed below:





·
            Maximum Average Total Leverage
      Ratio. On the last day of each fiscal quarter, our average total
      leverage ratio must be less than or equal to 3.25 to
      1.00.  Average Total Leverage Ratio is the ratio of the trailing
      twelve months (TTM) Average Total Funded Indebtedness plus the TTM
      Average Accounts Securitization Proceeds divided by the TTM EBITDA (as
      those terms are defined in our amended Credit Facility).  As of
      December 31, 2009, our average total leverage ratio equaled 2.87
      (compared to 2.77 as of December 31, 2008) and the TTM average
      total debt amount used in this calculation was
      $310.4 million.





·
            Minimum Fixed Charge
      Ratio. On the last day of each fiscal quarter, our fixed charge
      ratio must be greater than 2.25 to 1.00.  Fixed Charge Ratio is
      the ratio of the TTM EBITDAR (as defined in our amended Credit Facility)
      divided by TTM Interest Expense (as defined in our amended Credit
      Facility) paid or payable in cash plus TTM Rental Expense (as defined in
      our amended Credit Facility).  As of
      December 31, 2009, our fixed charge ratio equaled 2.42 (compared
      to 2.52 as of December 31, 2008) and TTM Rental Expense was
      $57.2 million.








35





The
Credit Facility limits the declaration and payment of dividends on our common
stock to no more than 50% of the preceding year’s Net Income (as defined in our
amended Credit Facility), provided no default or event of default has
occurred and the dividends are declared and paid in a manner consistent
with our past practice.  Failure to comply with any of our financial
covenants, scheduled interest payments, scheduled principal repayments, or any
other terms of our amended credit facilities could result in penalty payments,
higher interest rates on our borrowings or the acceleration of the
maturities of our outstanding debt.  As of
December 31, 2009, we were in compliance with all covenants and
financial ratio requirements.





On
February 26, 2010, we amended certain provisions in our Credit Facility to
increase the dividend limitation in 2010 from 50% to 55% of our 2009 Net
Income.  We believe we will remain in compliance with all covenants
and financial ratio requirements throughout 2010.  For additional
information regarding our debt arrangements, see Note 5 of “Notes to
Consolidated Financial Statements,” included in Item 8 of this Form
10-K.





We
believe we have adequate availability of capital to fund present operations and
the current capacity to finance any working capital needs that may
arise.  We continually evaluate potential acquisitions and hold
discussions with acquisition candidates. If suitable acquisition opportunities
arise that would require financing, we believe that we have the ability to
finance any such transactions.





As of
February 22, 2010, $53.0 million of the current Board authorized amount
under our share repurchase program remained available. While share repurchases
are not a current priority, we may continue to repurchase shares on the open
market from time to time depending on market conditions. We may use cash flows
from operations to fund these purchases or we may incur additional
debt.





Contractual
Obligations





At
December 31, 2009 our contractual obligations for long-term debt and
operating leases were as follows (in thousands):





Payments
      due by periodLess
      than
            
            
            
            
            
            
            
            
            More
      thanTotal
            
            
            1
      year
            
            
            1-3
      years
            
            
            3-5
      years
            
            
            5
      yearsLong-term
      debt
            $
            248,700
            
            $
            48,000
            
            $
            200,700
            
            $
            —
            
            $
            —Operating
      leases
            
            160,897
            
            
            43,517
            
            
            63,621
            
            
            32,323
            
            
            21,436$
            409,597
            
            $
            91,517
            
            $
            264,321
            
            $
            32,323
            
            $
            21,436





For
additional discussion related to our debt, see Note 5 of “Notes to Consolidated
Financial Statements,” included in Item 8 of this Form 10-K.  The
table below contains estimated interest payments related to our long-term
debt obligations listed in the table above.  Our estimates of
future interest payments are calculated based on the December 31, 2009
outstanding balances of each of our debt instruments and the related effective
interest rates for the year ended December 31, 2009.  On our
Term Loan and our Notes, the variable rates are converted to fixed rates under
our existing swap agreements.To project the
estimated interest expense to coincide with the time periods used in the table
above, we have projected the estimated debt balances for future years based on
information currently available related to scheduled payments and maturities of
these debt instruments.





Estimated
      payments due by periodLess
      than
            
            
            
            
            
            
            
            
            More
      thanTotal
            
            
            1
      year
            
            
            1-3
      years
            
            
            3-5
      years
            
            
            5
      yearsFuture
      interest expense
            $
            23,584
            
            $
            10,037
            
            $
            13,547
            
            $
            —
            
            $
            —





36


Item
7A.Quantitative
and Qualitative Disclosures about Market Risk





We are
exposed to market risks, including interest rate risk and foreign currency risk.
The adverse effects of potential changes in these market risks are discussed
below. The following discussion does not consider the effects of the reduced
level of overall economic activity that could exist following such changes.
Further, in the event of changes of such magnitude, we would likely take actions
to mitigate our exposure to such changes.





Interest
Rate Risk





Our
earnings are exposed to changes in short-term interest rates because of the
variable interest rates on our debt. However, we have entered into interest rate
swap agreements to reduce our exposure to fluctuations in interest
rates.  For information about our debt arrangements and interest rate
swaps, see Note 5 of “Notes to Consolidated Financial Statements,” included in
Item 8 of this Form 10-K.





In 2009,
there was no interest rate risk related to our Term Loan and our Notes since the
outstanding balances were fully hedged by our interest rate swaps.  If
the variable rates on our Revolver and our Receivables Facility increased 1.0%
from the rate at December 31, 2009 and we borrowed the maximum
available amounts under these arrangements during 2009, then our pretax income
would decrease by approximately $3.5 million and earnings per share would
decrease by $0.04 per diluted share (based on the number of weighed average
diluted shares outstanding at December 31, 2009).  The
maximum amount available under the Revolver is $315.0 million assuming that we
exercised the $75.0 million accordion feature.





Failure
of our swap counterparties would result in the loss of any potential benefit to
us under our swap agreements. In this case, we would still be obligated to pay
the variable interest payments underlying our debt
agreements.  Additionally, failure of our swap counterparties would
not eliminate our obligation to continue to make payments under our existing
swap agreements if we continue to be in a net pay position.





Currency
Risk





We have
wholly owned subsidiaries in Canada, the United Kingdom, France, Italy,
Portugal, Spain and Mexico.  Based on the functional currencies for
these international subsidiaries as shown in the table below, changes in
exchange rates for these currencies may positively or negatively impact our
sales, operating expenses and earnings.  Historically, we have not
hedged our currency exposure and fluctuations in exchange rates have not
materially affected our operating results. While our international operations
accounted for only 9.5% of total net sales in 2009, significantly higher
volatility in these exchange rates in both 2008 and 2009 had a greater impact on
our consolidated results.  Despite the relative small size of our
international operations, our exposure to currency rate fluctuations could be
material in future years to the extent that either currency rate changes are
significant or that our international operations comprise a larger percentage of
our consolidated results.





Functional
      CurrenciesCanada
            Canadian
      DollarUnited
      Kingdom
            British
      PoundFrance
            EuroItaly
            EuroPortugal
            EuroSpain
            EuroMexico
            Peso








37





Item
8.Financial
Statements and Supplementary Data





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





PageReport of Independent Registered Public Accounting
      Firm
            39Consolidated Statements of Income
            40Consolidated Balance Sheets
            41Consolidated Statements of Cash Flows
            42Consolidated Statements of Changes in Stockholders’
      Equity
            43Notes to Consolidated Financial
    Statements
            44








38





Report of Independent Registered Public Accounting
Firm





The Board
of Directors and Shareholders


Pool
Corporation





We have
audited the accompanying consolidated balance sheets of Pool Corporation as of
December 31, 2009 and 2008, and the related consolidated statements of income,
stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2009.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the financial statements referred  to above present fairly,
in all material respects, the consolidated financial position of Pool
Corporation at December 31, 2009 and 2008, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally accepted accounting
principles.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Pool Corporation's internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 1, 2010 expressed an unqualified opinion
thereon.














New
Orleans, Louisiana


March 1,
2010


39





POOL CORPORATION


Consolidated
Statements of Income


(In
thousands, except per share data)





Year
      Ended December 31,2009
            
            
            2008
            
            
            2007Net
      sales
            $
            1,539,794
            
            $
            1,783,683
            
            $
            1,928,367Cost
      of sales
            
            1,090,070
            
            
            1,268,455
            
            
            1,397,721Gross profit
            
            449,724
            
            
            515,228
            
            
            530,646Selling
      and administrative expenses
            
            361,284
            
            
            399,752
            
            
            396,872Operating income
            
            88,440
            
            
            115,476
            
            
            133,774Interest
      expense, net
            
            9,667
            
            
            18,912
            
            
            22,148Income
      before income taxes and equity earnings (loss)
            
            78,773
            
            
            96,564
            
            
            111,626Provision
      for income taxes
            
            30,957
            
            
            37,911
            
            
            43,154Equity
      earnings (loss) in unconsolidated investments, net
            
            (28,614
            )
            
            (1,697
            )
            
            922Net
      income
            $
            19,202
            
            $
            56,956
            
            $
            69,394Earnings
      per share:Basic
            $
            0.39
            
            $
            1.19
            
            $
            1.42Diluted
            $
            0.39
            
            $
            1.17
            (1)
            $
            1.37Weighted
      average shares outstanding:Basic
            
            48,649
            
            
            47,861
            (1)
            
            48,978
            (1)Diluted
            
            49,049
            
            
            48,488
            (1)
            
            50,831
            (1)Cash
      dividends declared per common share
            $
            0.52
            
            $
            0.51
            
            $
            0.465





(1)  As adjusted – see Note 1.





The
accompanying Notes are an integral part of these Consolidated Financial
Statements.





40





POOL CORPORATION


Consolidated
Balance Sheets


(In
thousands, except share data)





December
      31,2009
            
            
            2008AssetsCurrent
      assets:Cash
      and cash equivalents
            $
            15,843
            
            $
            15,762Receivables,
      net
            
            96,364
            
            
            16,311Receivables
      pledged under receivables facility
            
            —
            
            
            99,273Product
      inventories, net
            
            355,528
            
            
            405,914Prepaid
      expenses and other current assets
            
            12,901
            
            
            7,676Deferred
      income taxes
            
            10,681
            
            
            11,908Total
      current assets
            
            491,317
            
            
            556,844Property
      and equipment, net
            
            31,432
            
            
            33,048Goodwill
            
            176,923
            
            
            169,569Other
      intangible assets, net
            
            13,917
            
            
            13,339Equity
      interest investments
            
            1,006
            
            
            31,157Other
      assets, net
            
            28,504
            
            
            26,949Total
      assets
            $
            743,099
            
            $
            830,906Liabilities
      and stockholders' equityCurrent
      liabilities:Accounts
      payable
            $
            178,391
            
            $
            173,688Accrued
      expenses and other current liabilities
            
            33,886
            
            
            61,701Short-term
      financing
            
            —
            
            
            20,792Current
      portion of long-term debt and other long-term liabilities
            
            48,236
            
            
            6,111Total
      current liabilities
            
            260,513
            
            
            262,292Deferred
      income taxes
            
            21,920
            
            
            20,032Long-term
      debt
            
            200,700
            
            
            301,000Other
      long-term liabilities
            
            7,779
            
            
            5,848Total
      liabilities
            
            400,912
            
            
            589,172Stockholders'
      equity:Common
      stock, $.001 par value; 100,000,000 shares authorized;
      48,991,729 and 48,218,872 sharesissued
      and outstanding at December 31, 2009 and
      2008, respectively
            
            49
            
            
            48Additional
      paid-in capital
            
            202,784
            
            
            189,665Retained
      earnings
            
            47,128
            
            
            54,407Accumulated
      other comprehensive income (loss)
            
            2,226
            
            
            (2,386
            )Total
      stockholders' equity
            
            252,187
            
            
            241,734Total
      liabilities and stockholders' equity
            $
            743,099
            
            $
            830,906





The
accompanying Notes are an integral part of these Consolidated Financial
Statements.





41


POOL CORPORATION


Consolidated
Statements of Cash Flows


(In
thousands)





Year
      Ended December 31,2009
            
            
            2008
            
            
            2007Operating
      activitiesNet
      income
            $
            19,202
            
            $
            56,956
            
            $
            69,394Adjustments
      to reconcile net income to net cash provided
      by operating activities:Depreciation
            
            9,091
            
            
            9,732
            
            
            9,289Amortization
            
            2,454
            
            
            3,722
            
            
            4,694Share-based
      compensation
            
            6,429
            
            
            6,709
            
            
            7,398Excess
      tax benefits from share-based compensation
            
            (2,408
            )
            
            (4,538
            )
            
            (8,482
            )Provision
      for doubtful accounts receivable, net of write-offs
            
            (2,762
            )
            
            4,619
            
            
            5,047Provision
      for inventory obsolescence, net
            
            (24
            )
            
            1,813
            
            
            610Change
      in deferred income taxes
            
            (560
            )
            
            (2,198
            )
            
            (3,747
            )Loss
      on sale of property and equipment
            
            362
            
            
            333
            
            
            56Equity
      (earnings) loss in unconsolidated investments
            
            30,036
            
            
            2,800
            
            
            (1,523
            )Gains
      on foreign currency transactions
            
            (1,846
            )
            
            —
            
            
            —Goodwill
      impairment
            
            310
            
            
            440
            
            
            —Other
            
            115
            
            
            (104
            )
            
            (40
            )Changes
      in operating assets and liabilities,net
      of effects of acquisitions and divestitures:Receivables
            
            25,441
            
            
            26,350
            
            
            8,822Product
      inventories
            
            56,676
            
            
            (11,098
            )
            
            (48,001
            )Prepaid
      expenses and other assets
            
            (6,178
            )
            
            25
            
            
            (870
            )Accounts
      payable
            
            (1,815
            )
            
            (24,916
            )
            
            16,505Accrued
      expenses and other current liabilities
            
            (21,273
            )
            
            22,637
            
            
            12,492Net
      cash provided by operating activities
            
            113,250
            
            
            93,282
            
            
            71,644Investing
      activitiesAcquisition
      of businesses, net of cash acquired
            
            (10,937
            )
            
            (35,466
            )
            
            (2,087
            )Divestiture
      of business
            
            —
            
            
            1,165
            
            
            —Proceeds
      from sale of investment
            
            —
            
            
            —
            
            
            75Purchase
      of property and equipment, net of sale proceeds
            
            (7,168
            )
            
            (7,003
            )
            
            (10,626
            )Net
      cash used in investing activities
            
            (18,105
            )
            
            (41,304
            )
            
            (12,638
            )Financing
      activitiesProceeds
      from revolving line of credit
            
            446,937
            
            
            370,948
            
            
            477,246Payments
      on revolving line of credit
            
            (499,237
            )
            
            (343,473
            )
            
            (482,878
            )Proceeds
      from asset-backed financing
            
            57,000
            
            
            83,335
            
            
            87,479Payments
      on asset-backed financing
            
            (77,792
            )
            
            (130,870
            )
            
            (93,438
            )Proceeds
      from long-term debt
            
            —
            
            
            —
            
            
            100,000Payments
      on long-term debt and other long-term liabilities
            
            (6,157
            )
            
            (3,171
            )
            
            (4,321
            )Payments
      of capital lease obligations
            
            —
            
            
            (251
            )
            
            (257
            )Payment
      of deferred financing costs
            
            (305
            )
            
            (56
            )
            
            (1,152
            )Excess
      tax benefits from share-based compensation
            
            2,408
            
            
            4,538
            
            
            8,482Proceeds
      from stock issued under share-based compensation plans
            
            4,283
            
            
            6,423
            
            
            7,292Payments
      of cash dividends
            
            (25,310
            )
            
            (24,431
            )
            
            (22,734
            )Purchases
      of treasury stock
            
            (1,171
            )
            
            (7,718
            )
            
            (139,676
            )Net
      cash used in financing activities
            
            (99,344
            )
            
            (44,726
            )
            
            (63,957
            )Effect
      of exchange rate changes on cash
            
            4,280
            
            
            (7,315
            )
            
            4,042Change
      in cash and cash equivalents
            
            81
            
            
            (63
            )
            
            (909
            )Cash
      and cash equivalents at beginning of year
            
            15,762
            
            
            15,825
            
            
            16,734Cash
      and cash equivalents at end of year
            $
            15,843
            
            $
            15,762
            
            $
            15,825





The
accompanying Notes are an integral part of these Consolidated Financial
Statements.


42


POOL CORPORATION


Consolidated
Statements of Changes in Stockholders’ Equity


(In
thousands, amounts in Dollars except share data)





AccumulatedAdditional
            
            
            
            OtherCommon
      Stock
            
            Treasury
            
            Paid-In
            
            Retained
            
            ComprehensiveShares
            
            Amount
            
            Stock
            
            Capital
            
            Earnings
            
            Income
      (Loss)
            
            TotalBalance
      at December 31, 2006
            
            50,929
            
            50
            
            (7,334
            )
            148,821
            
            129,932
            
            6,215
            
            277,684Net
      income
            
            —
            
            —
            
            —
            
            —
            
            69,394
            
            —
            
            69,394Foreign
      currency translation
            
            —
            
            —
            
            —
            
            —
            
            —
            
            4,042
            
            4,042Interest
      rate swap, net of tax of $1,606
            
            —
            
            —
            
            —
            
            —
            
            —
            
            (2,553
            )
            (2,553
            )Comprehensive
      income, net of tax
            
            
            
            
            
            
            
            
            
            
            
            
            
            70,883Treasury
      stock, 4,165 sharesof common stock
            
            —
            
            —
            
            (139,676
            )
            —
            
            —
            
            —
            
            (139,676
            )Retirement
      of treasury shares
            
            (4,351
            )
            (4
            )
            147,010
            
            —
            
            (147,006
            )
            —
            
            —FIN
      48 cumulative adjustment
            
            —
            
            —
            
            —
            
            —
            
            (542
            )
            —
            
            (542
            )Share-based
      compensation
            
            —
            
            —
            
            —
            
            7,398
            
            —
            
            —
            
            7,398Exercise
      of stock optionsincluding
      tax benefit of $8,482
            
            839
            
            1
            
            —
            
            14,544
            
            —
            
            —
            
            14,545Declaration
      of cash dividends
            
            —
            
            —
            
            —
            
            —
            
            (22,734
            )
            —
            
            (22,734
            )Issuance
      of restricted stock
            
            62
            
            —
            
            —
            
            —
            
            —
            
            —
            
            —Employee
      stock purchase plan
            
            37
            
            —
            
            —
            
            1,233
            
            —
            
            —
            
            1,233Balance
      at December 31, 2007
            
            47,516
            
            47
            
            —
            
            171,996
            
            29,044
            
            7,704
            
            208,791Net
      income
            
            —
            
            —
            
            —
            
            —
            
            56,956
            
            —
            
            56,956Foreign
      currency translation
            
            —
            
            —
            
            —
            
            —
            
            —
            
            (7,315
            )
            (7,315
            )Interest
      rate swap, net of tax of $1,730
            
            —
            
            —
            
            —
            
            —
            
            —
            
            (2,775
            )
            (2,775
            )Comprehensive
      income, net of tax
            
            
            
            
            
            
            
            
            
            
            
            
            
            46,866Treasury
      stock, 429 sharesof common stock
            
            —
            
            —
            
            (7,719
            )
            —
            
            —
            
            —
            
            (7,719
            )Retirement
      of treasury shares
            
            (429
            )
            (1
            )
            7,719
            
            —
            
            (7,718
            )
            —
            
            —Share-based
      compensation
            
            —
            
            —
            
            —
            
            6,709
            
            —
            
            —
            
            6,709Exercise
      of stock optionsincluding
      tax benefit of $4,538
            
            1,058
            
            2
            
            —
            
            9,875
            
            —
            
            —
            
            9,877Declaration
      of cash dividends
            
            —
            
            —
            
            —
            
            —
            
            (24,431
            )
            —
            
            (24,431
            )Issuance
      of restricted stock
            
            5
            
            —
            
            —
            
            —
            
            —
            
            —
            
            —Other
            
            —
            
            —
            
            —
            
            —
            
            556
            
            —
            
            556Employee
      stock purchase plan
            
            68
            
            —
            
            —
            
            1,085
            
            —
            
            —
            
            1,085Balance
      at December 31, 2008
            
            48,218
            
            48
            
            —
            
            189,665
            
            54,407
            
            (2,386
            )
            241,734Net
      income
            
            —
            
            —
            
            —
            
            —
            
            19,202
            
            —
            
            19,202Foreign
      currency translation
            
            —
            
            —
            
            —
            
            —
            
            —
            
            2,434
            
            2,434Interest
      rate swap, net of tax of $1,299
            
            —
            
            —
            
            —
            
            —
            
            —
            
            2,178
            
            2,178Comprehensive
      income, net of tax
            
            
            
            
            
            
            
            
            
            
            
            
            
            23,814Treasury
      stock, 49 sharesof common stock
            
            
            
            —
            
            (1,171
            )
            —
            
            
            
            —
            
            (1,171
            )Retirement
      of treasury shares
            
            (49
            )
            —
            
            1,171
            
            —
            
            (1,171
            )
            —
            
            —Share-based
      compensation
            
            —
            
            —
            
            —
            
            6,429
            
            —
            
            —
            
            6,429Exercise
      of stock optionsincluding
      tax benefit of $2,408
            
            558
            
            1
            
            —
            
            5,846
            
            —
            
            —
            
            5,847Declaration
      of cash dividends
            
            —
            
            —
            
            —
            
            —
            
            (25,310
            )
            —
            
            (25,310
            )Issuance
      of restricted stock
            
            206
            
            —
            
            —
            
            —
            
            —
            
            —
            
            —Employee
      stock purchase plan
            
            58
            
            —
            
            —
            
            844
            
            —
            
            —
            
            844Balance
      at December 31, 2009
            
            48,991
            
            49
            
            —
            
            202,784
            
            47,128
            
            2,226
            
            252,187





The
accompanying Notes are an integral part of these Consolidated Financial
Statements.





43


POOL CORPORATION
 Notes
to Consolidated Financial Statements


Note 1 - Organization and Summary of Significant Accounting
Policies





Description
of Business





As of
December 31, 2009, Pool Corporation and our wholly owned subsidiaries
(the Company, which may
be referred to as POOL,
we, usor our), maintained 287 sales
centers in North America and Europe from which we sell swimming pool equipment,
parts and supplies and irrigation and landscape products to pool builders,
retail stores, service companies, landscape contractors and golf courses. We
distribute products through three networks: SCP Distributors
LLC (SCP), Superior Pool Products LLC (Superior) and Horizon
Distributors, Inc. (Horizon).  Superior
and Horizon are both wholly owned subsidiaries of SCP, which is a wholly owned
subsidiary of Pool Corporation.





Basis
of Presentation and Principles of Consolidation





We
prepared the Consolidated Financial Statements following U.S. generally accepted
accounting principles (GAAP) and the requirements of the Securities and Exchange
Commission (SEC). The financial statements include all normal and recurring
adjustments that are necessary for a fair presentation of our financial position
and operating results.  The Consolidated Financial Statements include
the accounts of Pool Corporation and our wholly owned subsidiaries.
We eliminated all significant intercompany accounts and transactions among
our wholly owned subsidiaries.





Subsequent
Events





We have
evaluated subsequent events through March 1, 2010, which is the date
these financial statements were available to be issued.  For
discussion of specific subsequent events, see Note 14.





Use
of Estimates





In order
to prepare financial statements that conform to GAAP, we make estimates and
assumptions that affect the amounts reported in our financial statements and
accompanying notes. Our most significant estimates are those relating to the
allowance for doubtful accounts, the inventory reserve, vendor incentives,
income taxes, incentive compensation accruals and impairment
evaluations.  We continually review our estimates and make adjustments
as necessary, but actual results could be significantly different from what we
expected when we made these estimates.





Segment
Reporting





Accounting
Standards Codification (ASC) 280, Segment Reporting,establishes standards for the way that public companies report
information about operating segments in annual financial statements and for
related disclosures about products and services, geographic areas and major
customers. POOL’s management evaluates our sales centers based upon their
individual performance relative to predetermined standards that include both
financial and operational measures. Additionally, POOL’s management makes
decisions about how to allocate resources primarily on a sales center-by-sales
center basis. Since all of our sales centers have similar operations and share
similar economic characteristics, we aggregate our sales centers into a single
reportable segment.





Based on
the number of product lines and product categories we have, the fact that we do
not track sales by product lines and product categories on a consolidated basis
and the fact that we make ongoing changes to how products are classified within
these groups, it is impracticable to report our sales by product
category.





Seasonality
and Weather





Our
business is highly seasonal and weather is one of the principal external factors
affecting our business.  In general, sales and net 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.





44


Revenue
Recognition





We
recognize revenue in accordance with ASC 605-10-S25, Revenue Recognition. This
guidance requires that four basic criteria must be met before we can recognize
revenue:





1.      persuasive
evidence of an arrangement exists;


2.      delivery
has occurred or services have been rendered;


3.      the
seller’s price to the buyer is fixed or determinable; and


4.      collectibility
is reasonably assured.





We record
revenue when customers take delivery of products. Customers may pick up products
at any sales center location, or products may be delivered via our trucks or
third party carriers. Products shipped via third party carriers are considered
delivered based on the shipping terms, which are generally FOB shipping
point.





We may
offer volume incentives to customers.  We account for these incentives
as an adjustment to net sales.  We estimate the amount of volume
incentives earned based on our estimate of cumulative sales for the fiscal year
relative to our customers’ progress toward achieving minimum purchase
requirements. We record customer returns, including those associated with early
buy programs, as an adjustment to net sales. In the past, customer returns have
not been material.





We report
revenue net of tax amounts that we collect from our customers and remit to
governmental authorities. These tax amounts may include, but are not limited to,
sales, use, value added and some excise taxes.





Vendor
Incentives





We
account for vendor incentives in accordance with ASC 605-50-25-10, Customer’s Accounting for Certain
Consideration Received from a Vendor.Many of our arrangements with our
vendors provide for us to receive incentives of specified amounts of
consideration, payable to us when we achieve any of a number of measures. These
measures are generally related to the volume level of purchases from our vendors
and may include negotiated pricing arrangements. We account for such incentives
as if they are a reduction of the prices of the vendor’s products and therefore
as a reduction of inventory until we sell the product, at which time such
incentives are recognized as a reduction of cost of sales in our income
statement.





Throughout
the year, we estimate the amount of the incentive earned based on our estimate
of cumulative purchases for the fiscal year relative to the purchase levels that
mark our progress toward earning the incentives. We accrue vendor incentives on
a monthly basis using these estimates provided that we determine they are
probable and reasonably estimable. We continually revise these estimates to
reflect actual incentives earned based on actual purchase levels and trends.
When we make adjustments to our estimates, we determine whether any portion of
the adjustment impacts the amount of vendor incentives that are deferred in
inventory. In accordance with ASC 605-50-25-10, we recognize changes in our
estimates for vendor incentives as a cumulative catch-up adjustment to the
amounts recognized to date in our Consolidated Financial
Statements.





Shipping
and Handling Costs





We
include shipping and handling fees billed to customers in net sales and we
record shipping and handling costs associated with inbound freight as cost of
sales. The table below presents shipping and handling costs associated with
outbound freight, which we include in selling and administrative expenses (in
thousands):





2009
            
            
            2008
            
            
            2007$
            28,482
            
            $
            38,024
            
            $
            36,054





45


Share-Based
Compensation





We
account for our employee stock options under ASC 718, Compensation – Stock Compensation,which requires companies to recognize compensation cost for stock options
and other stock-based awards based on the estimated fair value as measured on
the grant date. We have selected a Black-Scholes model for estimating the grant
date fair value of share-based payments under ASC 718.  For additional
discussion of share-based compensation, see Note 7.





Advertising
Costs





We
expense advertising costs when incurred. The table below presents advertising
expense for the past three years (in thousands):





2009
            
            
            2008
            
            
            2007$
            4,990
            
            $
            7,139
            
            $
            7,646





Income
Taxes





In
accordance with ASC 740, Income Taxes,
we record deferred tax assets or liabilities based on differences between
financial reporting and tax basis of assets and liabilities using currently
enacted rates and laws that will be in effect when we expect the differences to
reverse. Due to changing tax laws and state income tax rates, significant
judgment is required to estimate the effective tax rate expected to apply to tax
differences that are expected to reverse in the future.





We record
a valuation allowance to reduce the carrying amounts of net deferred tax assets
if there is uncertainty regarding their realization. We consider many factors
when assessing the likelihood of future realization including our recent
cumulative earnings experience by taxing jurisdiction, expectations of future
taxable income, the carryforward periods available to us for tax reporting
purposes and other relevant factors.For
additional discussion of income taxes, see Note 8.





Equity
Method Investments





We
account for our 38% investment in Latham Acquisition Corporation (LAC) and our
50% investment in Northpark Corporate Center, LLC (NCC) using the
equity method of accounting. Accordingly, we report our share of income or loss
based on our ownership interests in these investments.





LAC is a
manufacturer of packaged pools and related products.  We recorded a
$2.2 million equity net loss related to our share of LAC’s loss from
ongoing operations for the eight months ended August 2009.  As of
September 1, 2009, LAC performed an interim goodwill and other
intangible asset impairment test and recorded a non-cash impairment charge in
accordance with GAAP.  Since our pro rata share of this impairment
charge exceeded our equity investment balance, we recognized a $26.5 million
equity loss equal to our equity investment balance as of
September 1, 2009, reducing the recorded value of our investment in
LAC to zero.  We have not recognized any tax benefits related to the
write-down of our equity investment in LAC.Since
we have a $14.4 million tax deductible basis in this investment, we
have recorded a $5.7 million deferred tax asset and corresponding valuation
allowance.





In
December 2009, LAC filed for bankruptcy and its Plan of Reorganization was
approved by the United States Bankruptcy Court for the District of Delaware in
January 2010, allowing it to emerge from bankruptcy.  As of the
date of the approval, we no longer have an equity interest in LAC and will not
recognize any impact related to LAC’s future earnings or losses.





Earnings
Per Share





In
accordance with ASC 260, Earnings per Share, we
calculate basic earnings per share by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share includes
the dilutive effects of share-based awards.





On
January 1, 2009, we adopted ASC 260-10-45-61A.  This
guidance states that unvested share-based payment awards that contain
non-forfeitable rights to dividends (such as our unvested restricted stock
awards) are participating securities and should be included in the computation
of both basic and diluted earnings per share.  According to the
provisions of ASC 260-10-45-61A, we now include outstanding unvested
restricted stock awards of our common stock in the basic weighted average share
calculation and have adjusted prior period basic and diluted weighted average
common shares outstanding to reflect the retrospective adoption of this
guidance.  The adoption of this guidance resulted in a $0.01 decrease
in our diluted earnings per share for 2008 due to rounding, but did not change
our diluted earnings per share for 2007.





For
additional discussion of earnings per share, see Note 9.




46


Foreign
Currency





The
functional currency of our foreign subsidiaries is the applicable local
currency. We translate our foreign subsidiary financials statements into U.S.
dollars based on published exchange rates in accordance with ASC 830, Foreign Currency Matters.
These translation adjustments are included in Accumulated other comprehensive
income (loss) in the Consolidated Balance Sheets and Consolidated Statements of
Stockholders’ Equity.  Transaction gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other than
the functional currency are included in Interest expense, net in the
Consolidated Statement of Income as realized.  We recorded foreign
currency transaction gains of $1.8 million in 2009.  In 2008 and 2007,
realized foreign currency transaction gains and losses were
immaterial.





Fair
Value Measurements and Interest Rate Swaps





ASC 820,
Fair Value Measurements and
Disclosures, provides a framework for measuring fair value and
establishes a fair value hierarchy that prioritizes the inputs used to measure
fair value, giving the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 inputs), the next priority
to observable market based inputs or unobservable inputs that are corroborated
by market data (Level 2 inputs) and the lowest priority to unobservable inputs
(Level 3 inputs).





In
measuring the fair value of our assets and liabilities, we use significant other
observable market data or assumptions (Level 2 inputs) that we believe market
participants would use in pricing an asset or liability, including assumptions
about risk when appropriate.  Our assets and liabilities that are
measured at fair value on a recurring basis include the unrealized gain or loss
on our interest rate swaps.





We
currently have three interest rate swaps in place to reduce our exposure to
fluctuations in interest rates, including one swap agreement with an effective
date of January 27, 2010. We designated these swaps as cash flow hedges and
record the changes in fair value of these swaps to Accumulated other
comprehensive income (loss). If our interest rate swaps became ineffective, we
would immediately recognize the changes in fair value of our swaps in
earnings.  We recognize any differences between the variable interest rate
payments and the fixed interest rate settlements from our swap
counterparties as an adjustment to interest expense over the life of the
swaps.  For additional discussion of our interest rate swaps, see Note
5.





Financial
Instruments





The
carrying values of cash, receivables, accounts payable and accrued liabilities
approximate fair value due to the short maturity of those instruments. The
carrying amount of long-term debt approximates fair value as it bears interest
at variable rates.





Cash
Equivalents





We
consider all highly liquid investments with an original maturity of three months
or less when purchased to be cash equivalents.









47


Credit
Risk and Allowance for Doubtful Accounts





We record
trade receivables at the invoiced amount less an allowance for doubtful accounts
for estimated losses due to customer non-payment. We perform periodic credit
evaluations of our customers and we typically do not require collateral.
Consistent with industry practices, we require payment from our customers within
30 days except for sales under early buy programs for which we provide extended
payment terms to qualified customers. The following table summarizes the changes
in our allowance for doubtful accounts for the past three years (in
thousands):





2009
            
            
            2008
            
            
            2007Balance
      at beginning of year
            $
            13,688
            
            $
            9,938
            
            $
            4,892Bad
      debt expense
            
            4,643
            
            
            9,855
            
            
            7,634Write-offs,
      net of recoveries
            
            (6,405
            )
            
            (5,355
            )
            
            (2,588
            )Reclassified
      balance (1)
            
            (500
            )
            
            (750
            )
            
            —Balance
      at end of year
            $
            11,426
            
            $
            13,688
            
            $
            9,938





(1)
            Upon
      conversion of a customer’s outstanding $1.8 million trade accounts
      receivable balance to a note receivable balance in January 2008, we
      reclassified both the gross trade accounts receivable balance and the
      associated reserve balance to other non-current assets on the Consolidated
      Balance Sheet.  In 2009, we reclassified a specific trade
      accounts receivable reserve balance to offset an outstanding customer note
      receivable balance that is recorded in other non-current assets on the
      Consolidated Balance Sheet.





Product
Inventories and Reserve for Inventory Obsolescence





Product
inventories consist primarily of goods we purchase from manufacturers to sell to
our customers. We record inventory at the lower of cost, using the average cost
method, or market. We establish our reserve for inventory obsolescence based on
inventory turns by category with particular emphasis on stock keeping units with
the weakest sales over the previous 12 months. The reserve is intended to
reflect the net realizable value of inventory that we may not be able to sell at
a profit.





In
evaluating the adequacy of our reserve for inventory obsolescence at the sales
center level, we consider a combination of factors including:





·
            the
      level of inventory in relationship to historical sales by product,
      including inventory usage by class based on product sales at both the
      sales center and Company levels;


·
            changes
      in customer preferences or regulatory
  requirements;


·
            seasonal
      fluctuations in inventory levels;


·
            geographic
      location; and


·
            new
      product offerings.





We
periodically adjust our reserve for inventory obsolescence as changes occur in
the above-identified factors.





The
following table summarizes the changes in our allowance for inventory
obsolescence for the past three years (in thousands):





2009
            
            
            2008
            
            
            2007Balance
      at beginning of year
            $
            8,448
            
            $
            5,403
            
            $
            4,777Acquisition
      of businesses, net (1)
            
            (619
            )
            
            1,165
            
            
            —Provision
      for inventory write-downs
            
            1,967
            
            
            3,131
            
            
            1,788Deduction
      for inventory write-offs
            
            (1,991
            )
            
            (1,251
            )
            
            (1,162
            )Balance
      at end of year
            $
            7,805
            
            $
            8,448
            
            $
            5,403





(1)
            Amounts
      reflect activity for acquisitions made prior to 2009.  As
      discussed below under ‘Acquisitions’, we prospectively applied the
      provisions of ASC 805, Business
      Combinations.






48


Property
and Equipment





Property
and equipment are stated at cost. We depreciate property and equipment on a
straight-line basis over the following estimated useful lives:





Buildings
            
            40
      yearsLeasehold
      improvements
            
            1 -
      10 years (1)Autos
      and trucks
            
            3
      yearsMachinery
      and equipment
            
            3 -
      10 yearsComputer
      equipment
            
            3 -
      5 yearsFurniture
      and fixtures
            
            10
      years





(1)
            For
      substantial improvements made near the end of a lease term where we are
      reasonably certain the lease will be renewed, we amortize the leasehold
      improvement over the remaining life of the lease including the expected
      renewal period.





The table
below presents depreciation expense for the past three years (in
thousands):





2009
            
            
            2008
            
            
            2007$
            9,091
            
            $
            9,732
            
            $
            9,289





Acquisitions





Effective
January 1, 2009, we adopted ASC 805, Business
Combinations.  This guidance amends previous guidance related
to business combinations.  We prospectively applied the provisions of
ASC 805.





Under
ASC 805, we use the acquisition method of accounting and recognize the
assets acquired and the liabilities assumed at fair value as of the
acquisition date.  Any contingent assets acquired and contingent
liabilities assumed are recognized at fair value, if we can reasonably estimate
fair value during the measurement period.  However, we are required to
remeasure any contingent liabilities at fair value in each subsequent reporting
period.  If our initial acquisition accounting is incomplete by the
end of the reporting period in which a business combination occurs, we are
required to report provisional amounts for incomplete items.  Once we
obtain information required to finalize the accounting for incomplete items, we
retrospectively adjust the provisional amounts recognized as of the acquisition
date.  Adjustments to these provisional amounts must be made during
the measurement period, which can not exceed one year from the acquisition
date.  Other substantial changes in this guidance included the
requirements to expense any restructuring costs associated with a business
combination and to expense all acquisition related costs as
incurred.





All
business combinations made prior to adoption of ASC 805 are accounted for
in accordance with the previous guidance. For all acquisitions, we include the
results of operations in our Consolidated Financial Statements as of the
acquisition date.  For additional discussion of acquisitions, see Note
2.





Goodwill
and Other Intangible Assets





Goodwill
represents the excess of the amount we paid to acquire a company over the
estimated fair value of tangible assets and identifiable intangible assets
acquired, less liabilities assumed. We account for goodwill under the provisions
of ASC 350, Intangibles-Goodwill and Other. In
accordance with these rules, we test goodwill and other indefinite lived
intangible assets for impairment annually or at any other time when impairment
indicators exist.





For our
annual goodwill impairment test, we compare our estimated fair value of
reporting units to their carrying value, including goodwill.  We
continually evaluate our operating performance against our estimates to
determine if an updated interim assessment is necessary.  Since we
define our operating segment as an individual sales center and we do not have
operations below the sales center level, our reporting unit is an individual
sales center.  For additional discussion of goodwill and other
intangible assets, see Note 3.





49


Self
Insurance





We are
self-insured for employee health benefits, workers’ compensation coverage,
automobile and property and casualty insurance. We have limited our exposure by
maintaining excess and aggregate liability coverage for each of these items. We
establish self-insurance reserves based on estimates of claims incurred but not
reported and information that we obtain from third-party service providers
regarding known claims. Our management reviews these reserves based on
consideration of various factors, including but not limited to the age of
existing claims, estimated settlement amounts and other historical claims
data.





Supplemental
Cash Flow Information





The
supplemental disclosures to the accompanying Consolidated Statements of Cash
Flows are as follows (in thousands):





Year
      Ended December 31,2009
            
            
            2008
            
            
            2007Cash
      paid during the year for:Interest
            $
            10,968
            
            $
            18,226
            
            $
            21,321Income
      taxes, net of refunds
            
            60,234
            
            
            8,619
            
            
            30,509





(1)The 2009 payments include $30.0 million
for deferred 2008 estimated federal income taxes.  See discussion at
Note 4.


Recent
Accounting Pronouncements





In June
2009, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards 168, The
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles—a replacement of FASB Statement No. 162 (SFAS
168).  The Accounting Standards Codification (ASC) is now the source
of authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities.  Rules and interpretive releases of the SEC under authority
of federal securities laws are also sources of authoritative GAAP for SEC
registrants. This ASC topic supersedes all existing non-SEC accounting and
reporting standards. All other non-SEC accounting literature excluded from the
ASC is now considered non-authoritative.  SFAS 168, as codified by ASC
105, Generally Accepted Accounting
Principles, is effective for financial statements issued for interim and
annual periods ending after September 15, 2009.  The adoption of
SFAS 168 impacted our financial statement disclosures, but did not affect our
consolidated financial position or results of operations.





Note
2 - Acquisitions and Divestitures





2009
Acquisitions





In
October 2009, we acquired the distribution assets of General Pool & Spa
Supply, Inc. (GPS), a leading regional swimming pool and spa products
distributor.  GPS is based in Northern California and operated
10 distribution sales centers.  As of
December 31, 2009, we had consolidated three of the acquired sales
centers into our existing sales centers.  The total consideration for
our acquisition of GPS includes approximately $2.5 million of deferred cash
consideration payable between April 2010 and April 2011.  We have
completed the initial acquisition accounting for GPS subject to adjustments in
accordance with terms of the purchase agreement and we do not expect to make any
significant adjustments during the measurement period.  This
acquisition did not have a material impact on our financial position or results
of operations.





2008
Acquisitions and Divestitures





In
March 2008, we acquired National Pool Tile Group, Inc. (NPT), a leading
wholesale distributor of pool tile and composite pool finishes serving
professional contractors in the swimming pool refurbish and construction markets
through 15 distribution sales centers.  We finalized the purchase
price allocations for this acquisition in the first quarter of
2009.  As of April 2009, we had consolidated seven of the
acquired sales centers into our existing sales centers.  This
acquisition did not have a material impact on our financial position or results
of operations.





50


Also in
March 2008, we acquired Canswim Pools (Canswim), a manufacturer of
in-ground swimming pools and a distributor of in-ground swimming pools and
supplies with one sales center location in Ontario, Canada.  We
finalized the purchase price allocations for this acquisition in the first
quarter of 2009.  This acquisition did not have a material impact on
our financial position or results of operations.





In
November 2008, we acquired Proplas Plasticos, S.L. (Proplas), a distributor
of swimming pool products and irrigation and plumbing supplies in Madrid,
Spain.  We finalized the purchase price allocations for this
acquisition in the fourth quarter of 2009.  This acquisition did not
have a material impact on our financial position or results of
operations.





In
April 2008, we divested our pool liner manufacturing operation in France
(SOFI Manufacturing).  We acquired SOFI Manufacturing as part of our
2003 acquisition of Sud Ouest Filtration, a distributor of swimming pool
products operating one sales center in Bordeaux, France.  Our decision
to divest our pool liner manufacturing operation allows us to focus on our core
distribution business.  This divestiture did not have a material
impact on our financial position or results of operations.





2007
Acquisitions





In
February 2007, we acquired Tor-Lyn Limited, a swimming pool supply distributor
with one sales center location in Ontario, Canada.  This acquisition
did not have a material impact on our financial position or results of
operations.





Note
3 - Goodwill and Other Intangible Assets





In
September 2009, we closed one of our Horizon sales centers in
Texas.  As a result, we performed an interim impairment test to
determine the implied fair value of this reporting unit’s
goodwill.  Since the implied fair value of goodwill was less than the
carrying value, we wrote off $0.3 million of goodwill related to this
reporting unit.  This impairment expense is recorded in selling and
administrative expenses on the Consolidated Statements of Income.





In
October 2009, we performed our annual goodwill impairment test.  As of
October 1, 2009, we had 203 reporting units with allocated goodwill
balances.  The highest goodwill balance is $7.1 million for our
UK reporting unit.  For the other reporting units, the highest
goodwill balance is $5.7 million and the average goodwill balance is
$0.8 million.  Based on our annual goodwill impairment test, we
believe the goodwill attributed to all of our reporting units is not
impaired.





The
changes in the carrying amount of goodwill are as follows (in
thousands):





Balance
      at December 31, 2007
            $
            155,247Acquired
      goodwill
            
            14,790Purchase
      price adjustments, net
            
            (28
            )Goodwill
      impairment
            
            (440
            )Balance
      at December 31, 2008
            
            169,569Acquired
      goodwill
            
            6,632Purchase
      price adjustments, net
            
            1,032Goodwill
      impairment
            
            (310
            )Balance
      at December 31, 2009
            $
            176,923





Purchase
price adjustments represent final adjustments in 2009 for the NPT, Canswim and
Proplas acquisitions, and in 2008 for the Tor-Lyn Limited
acquisition.





51


Other
intangible assets consist of the following (in thousands):





December
      31,2009
            
            2008Horizon
      tradename (indefinite life)
            $
            8,400
            
            $
            8,400NPT
      tradename (20 year life)
            
            1,500
            
            
            1,500Non-compete
      agreements (5 year weighted average useful life)
            
            9,321
            
            
            9,017Employment
      contracts (2.9 year weighted average useful life)
            
            650
            
            
            1,000Distribution
      agreement (5 year useful life)
            
            6,115
            
            
            6,11525,986
            
            
            26,032Less
      accumulated amortization
            
            (12,069
            )
            
            (12,693
            )$
            13,917
            
            $
            13,339





The
Horizon tradename has an indefinite useful life and is not subject to
amortization.  However, we evaluate the remaining useful life of this
intangible asset and test for impairment periodically as required by
ASC 350, Intangibles-Goodwill and
Other. The NPT tradename, non-compete agreements, employment contracts
and distribution agreement have finite useful lives and we amortize these
agreements using the straight-line method over their respective useful
lives.  The useful lives for our non-compete agreements and
distribution agreement are based on their contractual terms.





The
employment contracts and distribution agreement intangibles were fully amortized
as of December 31, 2008.  In 2009, we entered into a
non-compete agreement as part of the GPS acquisition and recorded an intangible
asset related to this agreement with an estimated fair value of
$2.35 million.  During 2009, we also wrote off two fully
amortized non-compete agreement intangibles that totaled $2.0 million and
three fully amortized employment agreement contracts that totaled
$0.35 million.  Other intangible amortization expense was
$1.8 million in 2009, $3.4 million in 2008 and $4.5 million in
2007.





The table
below presents estimated amortization expense for other intangible assets for
the next five years (in thousands):





2010
            $
            1,7252011
            
            1,0542012
            
            6752013
            
            6082014
            
            467





52


Note
4 - Details of Certain Balance Sheet Accounts





The table
below presents additional information regarding certain balance sheet accounts
(in thousands):





December
      31,2009
            
            
            2008Receivables:Trade
      accounts
            $
            84,702
            
            $
            5,454Trade
      accounts, pledged
            
            —
            
            
            99,273Vendor
      incentives, net
            
            21,545
            
            
            21,293Other,
      net
            
            1,543
            
            
            3,252107,790
            
            
            129,272Less
      allowance for doubtful accounts
            
            (11,426
            )
            
            (13,688
            )$
            96,364
            
            $
            115,584Prepaid
      expenses and other current assets:Prepaid
      expenses
            $
            6,828
            
            $
            7,676Income
      tax receivable
            
            6,073
            
            
            —$
            12,901
            
            $
            7,676Property
      and equipment:Land
            $
            1,641
            
            $
            1,631Building
            
            2,222
            
            
            2,145Leasehold
      improvements
            
            20,460
            
            
            19,208Autos
      and trucks
            
            1,757
            
            
            1,771Machinery
      and equipment
            
            20,157
            
            
            20,393Computer
      equipment
            
            24,153
            
            
            18,097Furniture
      and fixtures
            
            9,531
            
            
            9,654Fixed
      assets in progress
            
            939
            
            
            2,29980,860
            
            
            75,198Less
      accumulated depreciation
            
            (49,428
            )
            
            (42,150
            )$
            31,432
            
            $
            33,048Other
      assets, net:Non-current
      deferred income taxes
            $
            22,715
            
            $
            21,324Other
            
            5,789
            
            
            5,625$
            28,504
            
            $
            26,949Accrued
      expenses and other current liabilities:Salaries
      and bonuses
            $
            11,337
            
            $
            12,543Current
      deferred tax liability
            
            3,375
            
            
            3,685Other(1)
            
            19,174
            
            
            45,473$
            33,886
            
            $
            61,701





(1)
            The
      2008 balance includes $30.0 million of income taxes payable related to the
      deferral of estimated income tax payments as allowed by Internal Revenue
      Service Notice 2008-100, which was issued after Hurricane
      Gustav.





53


Note
5 - Debt





The
components of our debt for the past two years were as follows (in
thousands):





December
      31,2009
            
            
            2008Current
      portion:Accounts
      Receivable Securitization Facility (described below)
            $
            —
            
            $
            20,792Current
      portion of Term Loan
            
            48,000
            
            
            6,00048,000
            
            
            26,792Long-term
      portion:Revolving
      Line of Credit, variable rate (described below)
            
            100,700
            
            
            153,000Term
      Loan, variable rate (described below)
            
            —
            
            
            48,000Floating
      Rate Senior Notes (described below)
            
            100,000
            
            
            100,000200,700
            
            
            301,000Total
      debt
            $
            248,700
            
            $
            327,792





Unsecured
Syndicated Senior Credit Facility





As
amended on December 20, 2007, our unsecured syndicated senior credit facility
(the Credit Facility) provides for $300.0 million in borrowing capacity
including a $240.0 million five-year revolving credit facility (the
Revolver) and a $60.0 million term loan (the Term Loan). The Term Loan matures
on December 20, 2010 and the Revolver matures on December 20, 2012. The Credit
Facility includes sublimits for the issuance of swingline loans and standby or
trade letters of credit.   Pursuant to an accordion feature, the
aggregate maximum principal amount of the commitments under the Revolver may be
increased at our request and with agreement by the lenders by up to $75.0
million, to a total of $315.0 million.





At
December 31, 2009, there was $100.7 million outstanding and
$138.5 million available for borrowing under the Revolver. The weighted average
effective interest rate of the Revolver was approximately 1.9% for the year
ended December 31, 2009.





Borrowings
under the Revolver bear interest, at our option, at either of the
following:





a.
            a
      base rate, which is the greater of (i) the prime rate or (ii) the
      overnight Federal Funds Rate plus 0.500%; plus a spread ranging from 0% to
      0.250% depending on our leverage ratio;
or


b.
            the
      London Interbank Offered Rate (LIBOR) plus a spread ranging from 0.500% to
      1.250% depending on our leverage
ratio.





Borrowings
under the Term Loan bear interest, at our option, at either of the
following:





a.
            a
      base rate, which is the greater of (i) the Wachovia Bank, National
      Association prime rate or (ii) the overnight Federal Funds Rate plus
      0.500%; or


b.
            LIBOR
      plus a spread ranging from 0.625% to 0.750% depending on our leverage
      ratio.





We are
also required to pay the following amounts under the Credit
Facility:





a.
            an
      annual facility fee of 0.125% to 0.300% depending on our leverage
      ratio;


b.
            an
      annual letter of credit issuance fee of 0.125% multiplied by the face
      amount of each letter of credit;
and


c.
            a
      letter of credit commission of 0.500% to 1.250% multiplied by face amount
      of each letter of credit, depending on our leverage
  ratio.





At
December 31, 2009, there was $48.0 million outstanding under the
Term Loan which has remaining principal payments of $12.0 million per
quarter in 2010. The weighted average effective interest rate of the Term Loan
was approximately 3.2% for the year ended
December 31, 2009.  See discussion of our interest rate
swaps below.








54





Our
obligations under the Credit Facility are guaranteed by all of our existing and
future direct and indirect domestic subsidiaries. The Credit Facility contains
terms and provisions (including representations, covenants and conditions) and
events of default customary for transactions of this type. If an event of
default occurs and is continuing under the Credit Facility, the lenders may
terminate their obligations under the Credit Facility and may require us to
repay all amounts.





Floating
Rate Senior Notes





On
February 12, 2007, we issued and sold $100.0 million aggregate
principal amount of Floating Rate Senior Notes (the Notes) in a private
placement offering pursuant to a Note Purchase Agreement.  The Notes
are due February 12, 2012 and accrue interest on the unpaid principal
balance at a floating rate equal to a spread of 0.600% over the three-month
LIBOR, as adjusted from time to time.  The Notes have scheduled
quarterly interest payments that are due on February 12, May 12,
August 12 and November 12 of each year.  The Notes are
unsecured and are guaranteed by each domestic subsidiary that is or becomes a
borrower or guarantor under our Credit Facility.  In the event we have
a change of control, the holders of the Notes will have the right to put the
Notes back to us at par.  We used the net proceeds from the placement
to pay down borrowings under the Revolver.  See discussion of our
interest rate swaps below.





Accounts
Receivable Securitization Facility





Our
accounts receivable securitization facility (the Receivables Facility) provided
for the true sale of certain of our receivables as they were created to a wholly
owned, bankruptcy-remote subsidiary. This subsidiary granted an undivided
security interest in the receivables to an unrelated commercial paper conduit.
Because of the structure of the bankruptcy-remote subsidiary and our ability to
control its activities, we included the transferred receivables and related debt
in our Consolidated Balance Sheets.





In
May 2008, we renewed the Receivables Facility for one year through May
2009.  Effective September 2008, the Receivables Facility
provided a borrowing capacity of up to $95.0 million.





On
January 15, 2009, we amended our Receivables Facility to increase the required
loss reserves used in calculating the available funding amount, to loosen the
delinquency and default trigger ratios for our seasonally slower months of
October through April and to reduce the facility size from $95.0 million to
$75.0 million.





In May
2009, we amended the Receivables Facility to extend the termination date to
August 19, 2009, to increase the required reserves used in calculating
the available funding amount and to loosen the delinquency and default trigger
ratios.  As part of this amendment, the Receivables Facility had a
reduced borrowing capacity of up to $25.0 million.





On
August 19, 2009, the Receivables Facility terminated and was not
replaced since we believe that our existing credit facilities have adequate
capacity to meet our anticipated liquidity needs in the near term.





Interest
Rate Swaps





In
December 2005, we entered into an interest rate swap agreement to reduce
our exposure to fluctuations in interest rates on the Term Loan.  This
swap agreement terminated on December 31, 2008.





In
March 2008, we entered into a separate interest rate swap agreement to
reduce our exposure to fluctuations in interest rates for the remaining
outstanding period of the Term Loan.  The swap agreement converts the
Term Loan’s variable interest rate to a fixed rate of 2.4% on the initial
notional amount, which will decrease as payments are made on the Term Loan until
maturity on December 20, 2010.  This swap had an effective
date of December 31, 2008.





In
February 2007, we entered into an interest rate swap agreement to reduce our
exposure to fluctuations in interest rates on the Notes.  The swap
agreement converts the variable interest rate to a fixed rate of 5.088% on the
initial notional amount of $100.0 million, which will decrease to a notional
amount of $50.0 million in February 2010.  This swap agreement
terminates on February 12, 2012.  Including the 0.600%
spread, we expect to pay an effective interest rate on the Notes of
approximately 5.688%.






55





In
April 2009, we entered into an interest rate swap agreement to reduce our
future exposure to fluctuations in interest rates on the
Revolver.  This swap agreement will convert the Revolver’s variable
interest rate to a fixed rate of 1.725% on a notional amount of
$50.0 million.  The swap has an effective date of January 27,
2010 and will terminate on January 27, 2012.





During
the year ended December 31, 2009, no gains or losses were recognized on
these swaps and there was no effect on income from hedge ineffectiveness. The
net difference between interest paid and interest received related to the swap
agreements resulted in a $4.6 million increase in interest
expense.  The table below presents the fair value of our swap
agreements as of December 31, 2009 (in thousands):





Balance Sheet Line Item
            
            Unrealized
      LossesAccrued
      expenses and other current liabilities
            $
            (4,989
            )





Failure
of our swap counterparties would result in the loss of any potential benefit to
us under our swap agreements. In this case, we would still be obligated to pay
the variable interest payments underlying our debt
agreements.  Additionally, failure of our swap counterparties would
not eliminate our obligation to continue to make payments under our existing
swap agreements if we continue to be in a net pay position.





Financial
and Other Covenants





Financial
covenants on our amended Credit Facility and the Notes are closely aligned and
include a minimum fixed charge coverage ratio and maintenance of a maximum
average total leverage ratio, which are our most restrictive covenants. Other
covenants include restrictions on our ability to, among other things, pay
dividends or make other capital distributions (other than in accordance with our
current dividend policy). The Credit Facility also limits the declaration and
payment of dividends on our common stock to no more than 50% of the preceding
year’s net income, provided that we are not in default or no event of default
has occurred and the dividends are declared and paid in a manner consistent with
our past practice.





As of
December 31, 2009, we were in compliance with all covenants and financial
ratio requirements related to our Credit Facility and our Notes.





Deferred
Financing Costs





We
capitalize financing costs we incur related to implementing and amending our
debt arrangements. We record these costs as Other assets on our Consolidated
Balance Sheets and amortize them over the contractual life of the related debt
arrangements. The changes in deferred financing costs are as follows (in
thousands):





2009
            
            2008Deferred
      financing costs:Balance
      at beginning of year
            $
            2,064
            
            $
            2,008Financing
      costs deferred
            
            305
            
            
            56Write-off
      fully amortized deferred financing costs
            
            (342
            )
            
            -Balance
      at end of year
            
            2,027
            
            
            2,064Accumulated
      amortization of deferred financing costs:Balance
      at beginning of year
            $
            (835
            )
            $
            (469
            )Amortization
      of deferred financing costs
            
            (667
            )
            
            (366
            )Write-off
      fully amortized deferred financing costs
            
            342
            
            
            -Balance
      at end of year
            
            (1,160
            )
            
            (835
            )Deferred
      financing costs, net of accumulated amortization
            $
            867
            
            $
            1,229





56


Note
6 - Comprehensive Income





Comprehensive
income includes net income, foreign currency translation adjustments and the
unrealized gain or loss on interest rate swaps. The table below presents total
comprehensive income for the past three years (in thousands):





2009
            
            
            2008
            
            
            2007$
            23,814
            
            $
            46,866
            
            $
            70,883





Accumulated
other comprehensive income (loss) as presented on the Consolidated Balance
Sheets consists of the following components (in thousands):





Foreign
      Currency Translation
            
            
            Unrealized
      Gain (Loss) on Interest Rate Swaps (1)
            
            
            TotalBalance
      at December 31, 2007
            $
            10,136
            
            $
            (2,432
            )
            $
            7,704Net
      change
            
            (7,315
            )
            
            (2,775
            )
            
            (10,090
            )Balance
      at December 31, 2008
            
            2,821
            
            
            (5,207
            )
            
            (2,386
            )Net
      change
            
            2,434
            
            
            2,178
            
            
            4,612Balance
      at December 31, 2009
            $
            5,255
            
            $
            (3,029
            )
            $
            2,226





(1)
            Amounts
      are shown net of tax.





Note
7 - Share-Based Compensation





Share-Based
Plans





We award
stock options and restricted stock to our employees and non-employee directors
under our stock option plans.





Current
Plan





In May
2007, our stockholders approved the 2007 Long-Term Incentive Plan (the
2007 LTIP), which authorizes the Compensation Committee of our Board of
Directors (the Board) to grant non-qualified stock options and restricted stock
to employees, directors, consultants or advisors.  The 2007 LTIP
replaced the 2002 Plan and the Director Plan, both of which are discussed
below.  In May 2009, our stockholders approved the Amended and
Restated 2007 Long-Term Incentive Plan (the Amended 2007 LTIP).  The
amendment increased the number of shares that may be issued under the Amended
2007 LTIP from 1,515,000 shares to 5,415,000 shares.  Granted stock
options have an exercise price equal to our stock’s closing market price on the
date of grant. Depending on an employee’s length of service with the Company,
these options generally vest either five years from the grant date or on a
three/five year split vest schedule, where half of the options vest three years
from the grant date and the remainder vest five years from the grant date. These
options expire ten years from the grant date. Restricted stock awarded under the
Amended 2007 LTIP is issued at no cost to the grantee and is subject to vesting
restrictions. The restricted stock awards generally vest either one year from
the grant date for awards to directors or five years from the grant date for all
other awards.





Preceding
Plans





In May
2002, our stockholders approved the 2002 Long-Term Incentive Plan (the 2002
Plan), which authorized the Board to grant stock options and restricted stock
awards to employees, agents, consultants or independent contractors. In
May 2004, our stockholders approved an amendment to increase the number of
shares authorized for issuance under the 2002 Plan from 1,575,000 to 2,700,000
shares. Granted options have an exercise price equal to our stock’s market price
on the grant date. These options generally vest either five years from the grant
date or on a three/five year split vest schedule, where half of the options vest
three years from the grant date and the remainder vest five years from the grant
date. These options expire ten years from the grant date. In May 2007, the Board
suspended the 2002 Plan. Options granted prior to the suspension were not
affected by this action.







57





The SCP
Pool Corporation Non-Employee Directors Equity Incentive Plan (the Director
Plan) permitted the Board to grant stock options to each non-employee director.
No more than 1,350,000 shares were authorized to be issued under this plan.
Granted options have an exercise price equal to our stock’s market price on the
grant date. The options generally were exercisable one year after the grant
date, and they expire ten years after the grant date. The Director Plan expired
during 2006.





In May
1998, our stockholders approved the 1998 Stock Option Plan (the 1998 Plan),
which authorized the Board to grant stock options, stock appreciation rights,
restricted stock and performance awards to employees, agents, consultants or
independent contractors. These options generally were exercisable three or more
years after the grant date, and they expire ten years after the grant date. In
May 2002, the Board suspended the 1998 Plan. Options granted prior to the
suspension were not affected by this action.





All
awards granted under the 1995 Stock Option Plan were exercised or cancelled as
of December 31, 2008.





Stock
Option Awards





The
following is a summary of the stock option activity under our stock option plans
for the year ended December 31, 2009:





Shares
            
            
            Weighted
      Average Exercise Price
            
            Weighted
      Average Remaining Contractual Term (Years)
            
            
            Aggregate
      Intrinsic ValueBalance
      at December 31, 2008
            
            5,555,586
            
            $
            19.51Granted
            
            539,120
            
            
            18.44Exercised
            
            (557,252
            )
            
            6.17Forfeited
            
            (71,299
            )
            
            31.10Balance
      at December 31, 2009
            
            5,466,155
            
            $
            20.62
            
            4.91
            
            $
            18,064,159Exercisable
      at December 31, 2009
            
            3,222,560
            
            $
            16.54
            
            2.98
            
            $
            17,719,106





The table
below summarizes information about stock options outstanding and exercisable at
December 31, 2009:





Outstanding
      Stock Options
            
            Exercisable
      Stock OptionsWeighted
      AverageRemaining
            Weighted
            
            
            WeightedContractual
      Life
            Average
            
            
            AverageRange
      of exercise prices
            
            Shares
            (Years)
            Exercise
      Price
            
            Shares
            Exercise
      Price$
      0.00 to $ 5.99
            
            227,748
            0.23
            $
            4.35
            
            227,748
            $
            4.35$
      6.00 to $ 11.99
            
            1,331,481
            2.04
            
            10.77
            
            1,331,481
            
            10.77$
      12.00 to $ 17.99
            
            551,580
            2.18
            
            13.09
            
            551,180
            
            13.09$
      18.00 to $ 23.99
            
            1,910,454
            7.38
            
            20.20
            
            602,434
            
            21.60$
      24.00 to $ 29.99
            
            36,500
            4.52
            
            26.74
            
            36,500
            
            26.74$
      30.00 to $ 47.30
            
            1,408,392
            6.13
            
            35.91
            
            473,217
            
            35.415,466,155
            4.91
            $
            20.62
            
            3,222,560
            $
            16.54





58


The
following table summarizes the cash proceeds and tax benefits realized from the
exercise of stock options:





Year
      Ended December 31,(In
      thousands, except share amounts)
            
            2009
            
            
            2008
            
            
            2007Options
      exercised
            
            557,252
            
            
            1,057,760
            
            
            838,746Cash
      proceeds
            $
            3,439
            
            $
            5,339
            
            $
            6,061Intrinsic
      value of options exercised
            $
            7,870
            
            $
            14,312
            
            $
            24,457Tax
      benefits realized
            $
            3,093
            
            $
            5,619
            
            $
            9,443





We
estimated the fair value of employee stock option awards at the grant date based
on the assumptions summarized in the following table:




Year
      Ended December 31,(Weighted
      average)
            
            2009
            
            2008
            
            2007Expected
      volatility
            
            36.6
            %
            
            31.0
            %
            
            29.6
            %Expected
      term
            
            6.7
            years
            
            6.7
            years
            
            6.5
            yearsRisk-free
      interest rate
            
            2.94
            %
            
            3.17
            %
            
            4.49
            %Expected
      dividend yield
            
            2.0
            %
            
            1.0
            %
            
            1.0
            %Grant
      date fair value
            $
            6.18
            
            $
            6.89
            
            $
            12.99





We
calculated expected volatility over the expected term of the awards based on our
historical volatility.  We use weekly price observations for our
historical volatility calculation because we believe that they provide the most
appropriate measurement of volatility given the trading patterns of our common
stock.  We estimated the expected term based on the vesting period of
the awards and our historical exercise activity for awards with similar
characteristics. The risk-free interest rate is based on the U.S. Treasury
zero-coupon issues with a remaining term approximating the expected term of the
option. We determined the expected dividend yield based on the anticipated
dividends over the expected term.





For
purposes of recognizing share-based compensation expense, we ratably expense the
estimated fair value of employee stock options over the options’ requisite
service period. Generally, the requisite service period for our share-based
awards is the vesting period. We recognize compensation cost for awards with
graded vesting using the graded vesting recognition method.





The table
below presents the total share-based compensation expense for stock option
awards and the related recognized tax benefits for the past three years (in
thousands):





2009
            
            
            2008
            
            
            2007Share-based
      compensation expense
            $
            4,681
            
            $
            5,721
            
            $
            5,875Recognized
      tax benefits
            
            1,840
            
            
            2,246
            
            
            2,268





At
December 31, 2009, the unamortized compensation expense related to stock option
awards totaled $6.5 million, which will be recognized over a weighted
average period of 1.7 years.





59


Restricted Stock
Awards





The
following is a summary of the restricted stock awards activity under our stock
option plans for the year ended December 31, 2009:





Shares
            
            Weighted
      Average Grant Date Fair ValueBalance
      unvested at December 31, 2008
            
            94,823
            
            $
            27.43Granted
      (at market price)
            
            209,792
            
            
            18.44Vested
            
            (58,748
            )
            
            21.03Forfeited
            
            (3,300
            )
            
            18.44Balance
      unvested at December 31, 2009
            
            242,567
            
            $
            21.32





The
restricted stock awards generally vest one year from the grant date for awards
to directors and five years from the grant date for other awards. At December
31, 2009, the unamortized compensation expense related to the restricted stock
awards totaled $2.9 million, which will be recognized over a weighted
average period of 2.5 years.





The table
below presents the total number of restricted stock awards that vested for the
past three years and the related fair value of those awards (in thousands,
except share amounts):





2009
            
            
            2008
            
            
            2007Shares
      vested
            
            58,748
            
            
            20,326
            
            
            2,500Fair
      value of restricted stock awards vested
            $
            1,010
            
            $
            344
            
            $
            91





The table
below presents the total share-based compensation expense for restricted stock
awards for the past three years (in thousands):





2009
            
            
            2008
            
            
            2007Share-based
      compensation expense
            $
            1,560
            
            $
            809
            
            $
            1,321





Employee
Stock Purchase Plan





In March
1998, the Board adopted the SCP Pool Corporation Employee Stock Purchase Plan
(the ESPP). Under our ESPP, employees who meet minimum age and length of service
requirements may purchase stock at 85% of the lower of:





a. the
closing price of our common stock at the end of a six month plan period ending
either June 30 or December 31; or


b.the
average of the beginning and ending closing prices of our common stock for such
six month period.





No more
than 956,250 shares of our common stock may be issued under our ESPP. For the
two six month offering periods in each year presented below, we awarded the
following aggregate share amounts:





2009
            
            
            2008
            
            
            200757,839
            
            
            65,052
            
            
            50,424





The grant
date fair value for the most recent ESPP purchase period ended
December 31, 2009 was $3.89 per share.  Share-based
compensation expense related to our ESPP was $0.2 million in 2009, 2008 and
2007.





60


Note
8 - Income Taxes





Income
before income taxes and equity earnings (loss) is attributable to the following
jurisdictions (in thousands):





Year
      Ended December 31,2009
            
            2008
            
            2007United
      States
            $
            76,941
            
            $
            93,854
            
            $
            107,853Foreign
            
            1,832
            
            
            2,710
            
            
            3,773Total
            $
            78,773
            
            $
            96,564
            
            $
            111,626





The
provision for income taxes consisted of the following (in
thousands):





Year
      Ended December 31,2009
            
            2008
            
            2007Current:Federal
            $
            24,422
            
            $
            32,743
            
            $
            41,040State
      and other
            
            4,998
            
            
            6,262
            
            
            6,47129,420
            
            
            39,005
            
            
            47,511Deferred:Federal
            
            1,659
            
            
            (992
            )
            
            (4,005
            )State
      and other
            
            (122
            )
            
            (102
            )
            
            (352
            )1,537
            
            
            (1,094
            )
            
            (4,357
            )Total
            $
            30,957
            
            $
            37,911
            
            $
            43,154





We made
payments related to income taxes totaling $60.2 million in 2009 and
$8.6 million in 2008. We deferred our third and fourth quarter 2008
estimated federal tax payments of $30.0 million until January 2009 as
allowed by Internal Revenue Service Notice 2008-100, which was issued following
Hurricane Gustav.





A
reconciliation of the U.S. federal statutory tax rate to our effective tax rate
on income before income taxes and equity earnings (loss) is as
follows:





Year
      Ended December 31,2009
            
            
            2008
            
            
            2007Federal
      statutory rate
            
            35.00
            %
            
            35.00
            %
            
            35.00
            %Other,
      primarily state income tax rate
            
            4.30
            
            
            4.26
            
            
            3.66Total
      effective tax rate
            
            39.30
            %
            
            39.26
            %
            
            38.66
            %





We
recorded a reduction in the deferred tax liability of $1.4 million in 2009 and
$1.1 million in 2008 related to our equity losses in LAC.  These
amounts are not reflected in the tables above.





61


The
components of the deferred tax assets and liabilities are as follows (in
thousands):




December
      31,2009
              
              2008Deferred
      tax assets:Product
      inventories
              $
              8,268
              
              $
              8,727Accrued
      expenses
              
              1,323
              
              
              1,358Allowance
      for doubtful accounts
              
              1,090
              
              
              1,823Total
      current
              
              10,681
              
              
              11,908Leases
              
              1,562
              
              
              1,447Share-based
      compensation
              
              15,563
              
              
              13,789Uncertain
      tax positions
              
              1,592
              
              
              1,244Net
      operating losses
              
              2,766
              
              
              2,159Interest
      rate swaps
              
              1,961
              
              
              3,260Equity
      loss in unconsolidated investments
              
              5,653
              
              
              —Other
              
              2,037
              
              
              1,58431,134
              
              
              23,483Less:
      Valuation allowance
              
              (8,419
              )
              
              (2,159
              )Total
      non-current
              
              22,715
              
              
              21,324Total
      deferred tax assets
              
              33,396
              
              
              33,232Deferred
      tax liabilities:Trade
      discounts on purchases
              
              2,582
              
              
              2,540Prepaid
      expenses
              
              793
              
              
              1,145Total
      current
              
              3,375
              
              
              3,685Intangible
      assets, primarily goodwill
              
              21,109
              
              
              18,071Depreciation
              
              811
              
              
              538Equity
      earnings in unconsolidated investments
              
              —
              
              
              1,423Total
      non-current
              
              21,920
              
              
              20,032Total
      deferred tax liabilities
              
              25,295
              
              
              23,717Net
      deferred tax asset
              $
              8,101
              
              $
              9,515
  At
December 31, 2009, certain of our international subsidiaries had tax loss
carryforwards totaling approximately $9.0 million, which expire in various
years after 2010.  Deferred tax assets related to the tax loss
carryforwards of these international subsidiaries were $2.8 million as of
December 31, 2009 and $2.2 million as of December 31, 2008.  We
have recorded a corresponding valuation allowance of $2.8 million and
$2.2 million in the respective years.  We have also recorded a
$5.7 million valuation allowance related to our deferred tax asset recorded for
the write-off of our investment in LAC.





As
presented in the Consolidated Statements of Cash Flows, the change in deferred
income taxes includes, among other items, the change in deferred income taxes
related to the deferred income tax provision, the change in deferred income
taxes related to our equity loss in unconsolidated investments and the change in
deferred income taxes related to the estimated tax impact of accumulated other
comprehensive income (loss).





We reduce
federal and state income taxes payable by the tax benefits associated with the
exercise of nonqualified stock options. We receive an income tax benefit based
on the difference between the option exercise price and the fair market value of
the stock at the time the option is exercised. To the extent realized tax
deductions for option exercises exceed the amount of previously recognized
deferred tax benefits related to share-based compensation for these option
awards, we record an excess tax benefit in stockholders’ equity. We recorded
excess tax benefits of $2.4 million in 2009 and $4.5 million in
2008.






62




As of
December 31, 2009, United States income taxes were not provided on earnings of
our foreign subsidiaries, as we have invested or expect to invest the
undistributed earnings indefinitely. If in the future these earnings are
repatriated to the United States, or if we determine that the earnings will be
remitted in the foreseeable future, additional income tax provisions may be
required.





We hold,
through our affiliates, cash balances in the countries in which we operate,
including significant amounts held outside the United States. Most of the
amounts held outside the United States could be repatriated to the United
States, but, under current law, may be subject to United States federal income
taxes, less applicable foreign tax credits. Repatriation of some foreign
balances is restricted by local laws including the imposition of withholding
taxes in some jurisdictions. We have not provided for the United States federal
tax liability on these amounts and for financial statement purposes, these
foreign cash balances are considered indefinitely reinvested outside the United
States.





The
following is a summary of the activity related to uncertain tax positions for
the year ended December 31, 2009 (in thousands):





2009
            
            
            2008
            
            
            2007Balance
      at beginning of year
            $
            3,887
            
            $
            3,538
            
            $
            3,345Increases
      (decreases) for tax positions taken during a prior period
            
            579
            
            
            149
            
            
            (126
            )Increases
      for tax positions taken during the current period
            
            898
            
            
            928
            
            
            1,009Decreases
      resulting from the expiration of the statute of
limitations
            
            (814
            )
            
            (296
            )
            
            (588
            )Decreases
      relating to settlements
            
            —
            
            
            (432
            )
            
            (102
            )Balance
      at end of year
            $
            4,550
            
            $
            3,887
            
            $
            3,538





The total
amount of unrecognized tax benefits that, if recognized, would decrease the
effective tax rate was $3.0 million at December 31, 2009 and
$2.5 million at December 31, 2008.





We
recognize accrued interest related to unrecognized tax benefits in interest
expense and we recognize penalties in selling and administrative
expenses.  We had approximately $0.6 million in accrued interest
at December 31, 2009 and at December 31, 2008.





We file
income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions.  With few exceptions, we are no longer subject
to U.S. federal, state and local, or non-U.S. income tax examinations by tax
authorities for years before 2006.  We anticipate that the accounting
under the provisions of ASC 740 may provide for greater volatility in our
effective tax rate as items are derecognized or as we record changes in
measurement in interim periods.





63


Note
9 - Earnings Per Share





The table
below presents the reconciliation of basic and diluted weighted average number
of shares outstanding (in thousands):





Year
      Ended December 31,2009
            
            
            2008
            
            
            2007Net
      income
            $
            19,202
            
            $
            56,956
            
            $
            69,394Weighted
      average common shares outstanding:Basic
            
            48,649
            
            
            47,861
            (1)
            
            48,978
            (1)Effect
      of dilutive securities:Stock
      options
            
            394
            
            
            622
            
            
            1,848Employee
      stock purchase plan
            
            6
            
            
            5
            
            
            5Diluted
            
            49,049
            
            
            48,488
            (1)
            
            50,831
            (1)





(1)  As
adjusted for adoption of ASC 260-10-45-61A.  See discussion at Note
1.





The
weighted average diluted shares outstanding for the years ended December 31,
2009, December 31, 2008 and December 31, 2007 exclude stock options to purchase
3,355,345, 2,888,211 and 1,077,375 shares, respectively.  Since these
options have exercise prices that are higher than the average market price of
our common stock, including them in the calculation would have an anti-dilutive
effect on earnings per share for the respective periods.





Note
10 - Commitments and Contingencies





We lease
facilities for our corporate office, sales centers, vehicles and equipment under
operating leases that expire in various years through 2027. Most of our leases
contain renewal options, some of which involve rate increases. For leases with
step rent provisions whereby the rental payments increase incrementally over the
life of the lease, we recognize the total minimum lease payments on a
straight-line basis over the minimum lease term. The table below presents rent
expense associated with operating leases for the past three years (in
thousands):





2009
            
            
            2008
            
            
            2007$
            67,898
            
            $
            67,043
            
            $
            62,673





The table
below sets forth the approximate future minimum lease payments as of
December 31, 2009 related to non-cancelable operating leases and the
non-cancelable portion of certain vehicle operating leases with initial terms of
one year or more (in thousands):





2010
            
            43,5172011
            
            35,3222012
            
            28,2992013
            
            19,4012014
            
            12,922Thereafter
            
            21,436





From time
to time, we are subject to various claims and litigation arising in the ordinary
course of business, including product liability, personal injury, commercial,
contract and employment matters. While the outcome of any litigation is
inherently unpredictable, we do not believe, based on currently available facts,
that the ultimate resolution of any of these matters will have a material
adverse impact on our financial condition, results of operations or cash
flows.





64


Note
11 - Related Party Transactions





Policy





Our
policy for related party transactions is included within our written Audit
Committee Charter, which requires that our Audit Committee review and approve
all related party transactions that would be required to be disclosed in our
Annual Proxy Statement or may otherwise be required by NASDAQ.





Transactions





In May
2005, we acquired a 50% membership interest in NCC through a $1.1 million
cash contribution. NCC owns and operates an office building in Covington,
Louisiana. We lease corporate and administrative offices from NCC, occupying
approximately 50,000 square feet of office space. We amended the lease agreement
in May 2005 and the amended agreement has a ten year term.  As of
December 31, 2009, we pay rent of $68,263 per month.





In
January 2002, we entered into a lease agreement with S&C Development, LLC
for additional warehouse space adjacent to our Mandeville, Louisiana sales
center.  The sole member of S&C Development, LLC is A. David Cook,
a POOL executive officer.  The original five year lease term commenced
on February 4, 2002, and the current renewal covers a term of seven
years and will expire on December 31, 2013.  As of
December 31, 2009, we pay rent of $5,289 per month for the 8,600
square foot space.





In
January 2001, we entered into a lease agreement with S&C Development, LLC
for a sales center facility in Oklahoma City, Oklahoma. The ten year lease
term commenced on November 10, 2001 and will expire on
November 30, 2011.  As of December 31, 2009, we
pay rent of $13,203 per month for the 25,000 square foot facility.





In March
1997, we entered into a lease agreement with Kenneth St. Romain, a POOL
executive officer, for a sales center facility in
Baton Rouge, Louisiana. We extended this lease for a third term of
five years, which commenced on March 1, 2007 and will expire on
February 28, 2012.  As of December 31, 2009, we pay rent of
$10,973 per month for the 23,500 square foot facility.





In May
2001, we entered into a lease agreement with Kenneth St. Romain for a sales
center facility in Jackson, Mississippi. The original seven year lease term
commenced on November 16, 2001.  The current five year lease
renewal commenced on December 1, 2008 and will expire on November 30,
2013.  As of December 31, 2009, we pay rent of $9,360 per
month for the 20,000 square foot facility.





In
October 1999, we entered into a lease agreement with S&C Development, LLC
for a sales center facility in Mandeville, Louisiana. In
November 2007, S&C Development, LLC sold this facility to an unrelated
third party and we executed a lease with the new landlord.





The table
below presents rent expense associated with these leases for the past three
years (in thousands):





2009
            
            
            2008
            
            
            2007NCC
            $
            819
            
            $
            807
            
            $
            795Other
            
            461
            
            
            457
            
            
            522Total
            $
            1,280
            
            $
            1,264
            
            $
            1,317





65


Note
12 - Employee Benefit Plans





We offer
a 401(k) savings and retirement plan, which provides benefits for substantially
all employees who meet minimum age and length of service requirements. Eligible
employees are able to contribute up to 75% of their compensation, subject to the
federal dollar limit. For plan participants, we provide a matching contribution.
As of January 1, 2007, we contribute a total match on employee
contributions of up to 4% of their compensation, with a 100% match on the first
3% of compensation deferred and a 50% match on deferrals between 3% and 5% of
compensation.





Effective
March 1, 2005, we adopted the Pool Corp Deferred Compensation Plan, a
nonqualified deferred compensation plan. The plan allows certain employees who
occupy key management positions to defer salary and bonus amounts, and provides
a matching contribution similar to that provided under our 401(k) plan to the
extent that a participant’s contributions to the 401(k) plan are limited by IRS
non-discrimination limitations. The total Company matching contribution provided
to a participant under the 401(k) plan and the Pool Corp Deferred Compensation
Plan combined for any one year may not exceed 4% of a participant’s salary and
bonus.





The
employee and Company sponsored contributions are invested in certain equity and
fixed income securities based on individual employee elections.





The table
below sets forth our matching contributions for the past three years
(in thousands):





2009
            
            
            2008
            
            
            2007Matching
      contributions 401(k)
            $
            3,421
            
            $
            3,703
            
            $
            3,497Matching
      contributions deferred compensation plan
            
            16
            
            
            15
            
            
            32





Note
13 - Quarterly Financial Data (Unaudited)





The table
below summarizes the unaudited quarterly operating results of operations for the
past two years (in thousands, except per share data):





Quarter2009
            
            2008First
            
            
            Second
            
            
            Third
            
            
            Fourth
            
            
            First
            
            
            Second
            
            
            Third
            
            
            FourthNet
      sales
            $
            276,626
            
            $
            602,082
            
            $
            430,054
            
            $
            231,032
            
            $
            338,215
            
            $
            692,972
            
            $
            493,530
            
            $
            258,966Gross
      profit
            
            81,193
            
            
            178,068
            
            
            123,394
            
            
            67,069
            
            
            95,354
            
            
            202,752
            
            
            141,800
            
            
            75,322Net
      income (loss)
            
            (6,236
            )
            
            48,366
            
            
            (9,322
            )
            
            (13,606
            )
            
            (3,184
            )
            
            52,875
            
            
            22,060
            
            
            (14,795
            )Earnings
      (loss) per share:Basic
            $
            (0.13
            )
            $
            1.00
            
            $
            (0.19
            )
            $
            (0.28
            )
            $
            (0.07
            )
            $
            1.11
            
            $
            0.46
            
            $
            (0.31
            )Diluted
            $
            (0.13
            )
            $
            0.99
            
            $
            (0.19
            )
            $
            (0.28
            )
            $
            (0.07
            )
            $
            1.09
            
            $
            0.45
            
            $
            (0.31
            )





The sum
of basic and diluted earnings per share for each of the quarters may not equal
the total basic and diluted earnings per share for the annual periods because of
rounding differences and a difference in the way that in-the-money stock
options are considered from quarter to quarter under the requirements of ASC
260, Earnings per
Share.





Note
14 - Subsequent Events





In
December 2009, LAC filed for bankruptcy.  LAC’s Plan of Reorganization
was approved by the United States Bankruptcy Court for the District of Delaware
in January 2010, allowing it to emerge from bankruptcy.  As of
the date of the approval, we no longer have an equity interest in LAC and will
not recognize any impact related to LAC’s future earnings or
losses.  See Note 1 for further discussion of LAC.




On March
1, 2010, we amended certain provisions in our Credit Facility to increase the
dividend limitation in 2010 from 50% to 55% of our 2009 Net Income (as defined
in the Credit Facility agreement).  All other provisions of our Credit
Facility remain the same.





66


Item
9.Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure





Not
applicable.





Item
9A.Controls
and Procedures





The term
“disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e)
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 (1) recorded,
processed, summarized and reported within the time periods specified in the
Commission’s rules and forms and (2) accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosure.  As of December 31, 2009, management, including
the CEO and CFO, performed an evaluation of the effectiveness of our disclosure
controls and procedures.  Based on that evaluation, management,
including the CEO and CFO, concluded that as of December 31, 2009, our
disclosure controls and procedures were effective.





We
maintain a system of internal control over financial reporting that is designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. Based on the most recent
evaluation, we have concluded that no change in our internal control over
financial reporting occurred during the last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.





67


Management’s
Report on Internal Control Over Financial Reporting





POOL’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended.  Our internal
control system was designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation
of published financial statements.  All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Any evaluation or projection
of effectiveness to future periods is also subject to risk that controls may
become inadequate due to changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





POOL’s
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2009.  In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.Based on this assessment, management has concluded that, as of
December 31, 2009, POOL’s internal control over financial reporting was
effective.





The
independent registered public accounting firm that audited the Consolidated
Financial Statements included in Item 8 of this Form 10-K has issued a
report on POOL’s internal controls over financial reporting. This report appears
below.








68


Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Shareholders


Pool
Corporation





We have
audited Pool Corporation’s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). Pool Corporation’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.





In our
opinion, Pool Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on the
COSO criteria.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Pool
Corporation as of December 31, 2009 and 2008, and the related consolidated
statements of income, stockhholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2009 of Pool Corporation, and our
report dated March 1, 2010, expressed an unqualified opinion
thereon.













New
Orleans, Louisiana


March 1,
2010





69


Item 9B. Other Information





Not
applicable.





PART III.





Item
10.  Directors, Executive Officers and Corporate Governance





Incorporated
by reference to POOL’s 2010 Proxy Statement to be filed with the
SEC.





Item
11.  Executive Compensation





Incorporated
by reference to POOL’s 2010 Proxy Statement to be filed with the
SEC.





Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters





Incorporated
by reference to POOL’s 2010 Proxy Statement to be filed with the
SEC.





Item
13.  Certain Relationships and Related Transactions, and Director
Independence





Incorporated
by reference to POOL’s 2010 Proxy Statement to be filed with the
SEC.





Item
14.  Principal Accounting Fees and Services





Incorporated
by reference to POOL’s 2010 Proxy Statement to be filed with the
SEC.





70








PART IV.





Item
15.  Exhibits, Financial Statement Schedules





(a) The
following documents are filed as part of this report:





(1)
            Consolidated
      Financial Statements:PageReport of Independent Registered Public Accounting
      Firm
            39Consolidated Statements of Income
            40Consolidated Balance Sheets
            41Consolidated Statements of Cash Flows
            42Consolidated Statements of Changes in Stockholders’
      Equity
            43Notes to Consolidated Financial
    Statements
            44(2)
            Financial
      Statement Schedules.All
      schedules are omitted because they are not applicable or are not
      requiredor
      because the required information is provided in our Consolidated
      FinancialStatements
      or accompanying Notes included in Item 8 of this Form
  10-K.(3)
            The
      exhibits listed in the Index to Exhibits.








71





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) 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 March 1,
2010.





POOL
      CORPORATIONBy:
            /s/
      WILSON B. SEXTONWilson
      B. Sexton, Chairman of the Board and
      Director





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities indicated on March 1, 2010.





Signature:
            Title:/s/
      WILSON B. SEXTONWilson
      B. Sexton
            Chairman
      of the Board and Director/s/
      MANUEL J. PEREZ DE LA MESAManuel
      J. Perez de la Mesa
            President,
      Chief Executive Officer and Director/s/
      MARK W. JOSLINMark
      W. Joslin
            Vice
      President and Chief Financial Officer/s/
      MELANIE M. HOUSEYMelanie
      M. Housey
            Corporate
      Controller and Chief Accounting Officer/s/
      ANDREW W. CODEAndrew
      W. Code
            Director/s/
      JAMES J. GAFFNEYJames
      J. Gaffney
            Director/s/
      GEORGE T. HAYMAKERGeorge
      T. Haymaker
            Director/s/
      HARLAN F. SEYMOURHarlan
      F. Seymour
            Director/s/
      ROBERT C. SLEDDRobert
      C. Sledd
            Director/s/
      JOHN E. STOKELYJohn
      E. Stokely
            Director








72


INDEX TO EXHIBITS





Incorporated
      by ReferenceNo.
            
            Description
            
            Filed
      with this Form 10-K
            
            Form
            
            File
      No.
            
            Date
      Filed3.1
            
            Restated
      Certificate of Incorporation of the Company.
            
            
            
            10-Q
            
            000-26640
            
            08/09/20063.2
            
            Restated
      Composite Bylaws of the Company.
            
            
            
            10-Q
            
            000-26640
            
            08/09/20064.1
            
            Form
      of certificate representing shares of common stock of the
      Company.
            
            
            
            8-K
            
            000-26640
            
            05/19/200610.1
            *
            Amended
      and Restated Non-Employee Directors Equity Incentive Plan,
            
            
            
            10-Q
            
            000-26640
            
            08/13/200110.2
            
            as
      amended by Amendment No. 1.
            
            
            
            10-Q
            
            000-26640
            
            07/25/200210.3
            *
            SCP
      Pool Corporation 1998 Stock Option Plan.
            
            
            
            DEF
      14A
            
            000-26640
            
            04/08/199810.4
            *
            Form
      of Stock Option Agreement under 1998 Stock Option Plan.
            
            
            
            10-K
            
            000-26640
            
            03/31/199910.5
            *
            Amended
      and Restated SCP Pool Corporation Employee Stock Purchase
      Plan.
            
            
            
            10-Q
            
            000-26640
            
            07/25/200210.6
            *
            Amended
      and Restated SCP Pool Corporation 2002 Long-Term Incentive
      Plan.
            
            
            
            10-K
            
            000-26640
            
            03/01/200510.7
            *
            Form
      of Stock Option Agreement under 2002 Long-Term Incentive
    Plan.
            
            
            
            10-K
            
            000-26640
            
            03/01/200510.8
            *
            Pool
      Corporation Amended and Restated 2007 Long-Term Incentive
      Plan.
            
            
            
            8-K
            
            000-26640
            
            05/09/200910.9
            *
            Form
      of Stock Option Agreement for Employees under the Amended and Restated
      2007 Long-Term Incentive Plan.
            
            
            
            8-K
            
            000-26640
            
            05/06/200910.10
            *
            Form
      of Restricted Stock Agreement for Employees under the Amended and Restated
      2007 Long-Term Incentive Plan.
            
            
            
            8-K
            
            000-26640
            
            05/06/200910.11
            *
            Form
      of Stock Option Agreement for Directors under the Amended and Restated
      2007 Long-Term Incentive Plan.
            
            
            
            8-K
            
            000-26640
            
            05/06/200910.12
            *
            Form
      of Restricted Stock Agreement for Directors under the Amended and Restated
      2007 Long-Term Incentive Plan.
            
            
            
            8-K
            
            000-26640
            
            05/06/200910.13
            *
            Form
      of Employment Agreement.
            
            
            
            10-K
            
            000-26640
            
            03/18/200310.14
            *
            Employment
      Agreement, dated January 25, 1999, amongSCP Pool
      Corporation, South Central Pool Supply, Inc. and Manuel J. Perez
      de la Mesa.
            
            
            
            10-K
            
            000-26640
            
            03/31/199910.15
            *
            Employment
      Agreement, dated January 17, 2003, between SCP
      Distributors,LLC and A. David
      Cook.
            
            
            
            10-K
            
            000-26640
            
            03/01/200510.16
            *
            Employment
      Agreement, dated January 17, 2003, between SCP
      Distributors, LLC and Stephen C. Nelson.
            
            
            
            10-K
            
            000-26640
            
            03/01/200510.17
            *
            Compensation
      of Non-Employee Directors.
            
            X10.18
            *
            Form
      of Indemnity Agreement for Directors and Officers.
            
            
            
            10-Q
            
            000-26640
            
            10/29/200410.19
            
            Louisiana
      Tax Equalization Agreement.
            
            
            
            10-Q
            
            000-26640
            
            10/29/200410.20
            *
            Tax
      Reimbursement Arrangement.
            
            
            
            10-Q
            
            000-26640
            
            07/30/2004





73





Incorporated
      by ReferenceNo.
            
            Description
            
            Filed
      with this Form 10-K
            
            Form
            
            File
      No.
            
            Date
      Filed10.21
            
            Lease
      (Mandeville Sales Center) entered into as of October 19, 1999, by and
      between S&C DevelopmentCompany, LLC and South Central Pool Supply,
      Inc, as amended by Lease Agreement Amendment No. One, entered into as of
      May 26, 2000, by and between S&C Development Company, LLC and
      South Central Pool Supply, Inc,
            
            
            
            10-Q
            
            000-26640
            
            07/30/200410.22
            
            as
      amended by the Second Amendment entered into as of January 16, 2007 by and
      between S&C Development Company, LLC and SCP Distributors,
      LLC,
            
            
            
            10-K
            
            000-26640
            
            03/01/200710.23
            
            as
      amended by Lease Agreement (Warehouse) entered into as of January 16,
      2002, by and between S&C Development Company, LLC and SCP
      Distributors, LLC, as amended by First Amendment entered into as of
      February 11, 2002 by and between S&C Development
      Company, LLC and SCP Distributors, LLC,
            
            
            
            10-Q
            
            000-26640
            
            07/30/200410.24
            
            as
      amended by Second Amendment entered into as of January 16, 2007 by and
      between S&C Development Company, LLC and SCP Distributors,
      LLC.
            
            
            
            10-K
            
            000-26640
            
            03/01/200710.25
            
            Lease
      (Oklahoma City Sales Center) entered into as of January 15, 2001, by and
      between Dave Cook, individually and SCP Pool Corporation, as amended
      by First Amendment, entered into as of October 24, 2001 by and between
      S&C Development, LLC and SCP Pool Corporation, as amended by First
      Amendment, entered into, as of December 5, 2001 by and between S&C
      Development, LLC and SCP Pool
      Corporation.
            
            
            
            10-Q
            
            000-26640
            
            07/30/200410.26
            *
            Form
      of Stock Option Agreement under the Non-employee Directors Equity
      Incentive Plan.
            
            
            
            10-K
            
            000-26640
            
            03/01/200510.27
            
            Nonqualified
      Deferred Compensation Plan Basic Plan Document, dated March 1,
      2005.
            
            
            
            10-Q
            
            000-26640
            
            04/29/200510.28
            
            Nonqualified
      Deferred Compensation Plan Adoption Agreement by and among
      SCP Distributors, L.L.C., Superior Pool Products, L.L.C. and Cypress,
      Inc., dated March 1, 2005.
            
            
            
            10-Q
            
            000-26640
            
            04/29/200510.29
            
            Trust
      Agreement by and among SCP Distributors, L.L.C., Superior Pool Products,
      L.L.C. and Cypress, Inc. and T. Rowe Price Trust Company, dated March 1,
      2005.
            
            
            
            10-Q
            
            000-26640
            
            04/29/200510.30
            
            Agreement
      and Plan of Merger by and among Automatic Rain Company, Horizon
      Distributors, Inc. and the Shareholder Parties, dated August 26,
      2005.
            
            
            
            8-K
            
            000-26640
            
            10/04/2005





74





Incorporated
      by ReferenceNo.
            
            Description
            
            Filed
      with this Form 10-K
            
            Form
            
            File
      No.
            
            Date
      Filed10.31
            
            Note
      Purchase Agreement by and among Pool Corporation and the Purchasers party
      thereto.
            
            
            
            8-K
            
            000-26640
            
            02/15/200710.32
            
            Subsidiary
      Guaranty by Pool Corporation in favor of the holders from time to time of
      the Notes.
            
            
            
            8-K
            
            000-26640
            
            02/15/200710.33
            
            Amended
      and Restated Credit Agreement dated as of December 20, 2007, among Pool
      Corporation, as US Borrower, SCP Distributors Inc., as Canadian Borrower,
      the Lenders, Wachovia Bank, National Association, as Administrative Agent,
      Swingline Lender and Issuing Lender, Wachovia Capital Finance Corporation
      (Canada) as Canadian Dollar Lender, JPMorgan Chase Bank, a syndication
      Agent, Wells Fargo Bank National Association, Regions Bank and Capital
      One, National Association, as Documentation Agents,
            
            
            
            10-K
            
            000-26640
            
            02/29/200810.34
            
            as
      amended by First Amendment entered into as of
              March
      1, 2010.
            
            X10.35
            
            Amended
      and Restated Subsidiary Guaranty Agreement dated as of December 20,
      2007.
            
            
            
            10-K
            
            000-26640
            
            02/29/200810.36
            *
            2008
      Strategic Plan Incentive Program (SPIP)
            
            
            
            8-K
            
            000-26640
            
            03/03/200810.37
            *
            Pool
      Corporation Executive Bonus Plan.
            
            X14
            
            Code
      of Business Conduct and Ethics for Directors, Officers and
      Employees.
            
            
            
            10-K
            
            000-26640
            
            03/01/200421.1
            
            Subsidiaries
      of the registrant.
            
            X23.1
            
            Consent
      of Ernst & Young LLP.
            
            X31.1
            
            Certification
      by Mark W. Joslin pursuant to Rule 13a-14(a) and 15d-14(a), as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
            
            X31.2
            
            Certification
      by Manuel J. Perez de la Mesa pursuant to Rule 13a-14(a) and 15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.
            
            X32.1
            
            Certification
      by Manuel J. Perez de la Mesa and Mark W. Joslin pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
            
            X





*
            Indicates
      a management contract or compensatory plan or
  arrangement





75