# Pool Corp: Form 10-Q for the period ended Mar 31, 2014

- Company: [Pool Corp](/companies/pool.md) (CIK 945841)
- Form: 10-Q
- Filed: 2014-04-30
- Accepted by EDGAR: Apr 30, 2014, 11:43 ET
- Period: 2014-03-31
- Accession: 0000945841-14-000046
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/945841/000094584114000046/pool-2014331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/945841/000094584114000046/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-01-01 to 2014-03-31 | $406.3m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2014-01-01 to 2014-03-31 | $292.2m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2014-01-01 to 2014-03-31 | $114.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2014-01-01 to 2014-03-31 | $105.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2014-01-01 to 2014-03-31 | $8.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2014-01-01 to 2014-03-31 | $2.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-01-01 to 2014-03-31 | $4.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-01-01 to 2014-03-31 | $0.09 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-01-01 to 2014-03-31 | $0.09 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-01-01 to 2014-03-31 | 46,375,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2014-01-01 to 2014-03-31 | −$37.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2014-01-01 to 2014-03-31 | $5.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2014-01-01 to 2014-03-31 | $8.6m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2014-01-01 to 2014-03-31 | $28.2m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2014-03-31 | $7.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-03-31 | $761.0m | us-gaap:AssetsCurrent |
| Total assets | at 2014-03-31 | $1.01bn | us-gaap:Assets |
| Current liabilities | at 2014-03-31 | $398.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-03-31 | $751.5m | us-gaap:Liabilities |
| Long-term debt | at 2014-03-31 | $324.2m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2014-03-31 | $261.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,594 characters.

You should read the following discussion in conjunction with Management's Discussion and Analysis included in our 2013 Annual Report on Form 10-K.

For a discussion of our base business calculations, see the RESULTS OF OPERATIONS section below.

### Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995

Our disclosure and analysis in this report contains forward-looking information that involves risks and uncertainties. Our forward‑looking statements express our current expectations or forecasts of possible future results or events, including projections of future performance, statements of management’s plans and objectives, future contracts, and forecasts of trends and other matters. Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as “anticipate,” “estimate,” “expect,” “believe,” “will likely result,” “outlook,” “project,” “should” and other words and expressions of similar meaning.

No assurance can be given that the results in any forward-looking statements will be achieved and actual results may differ materially due to one or more factors, including the sensitivity of our business to weather conditions, changes in the economy and the housing market, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants and other risks detailed in our 2013 Annual Report on Form 10-K. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.

### OVERVIEW

### Financial Results

As we focus on the emerging 2014 season, we believe our first quarter results are a solid starting point. From an operational perspective, the first quarter offers us an opportunity to further every aspect of our business. We have expanded into new areas and have enhanced our product offerings to extend our reach and our ability to better serve our customers.

Net sales for the quarter ended March 31, 2014 increased 10% compared to the first quarter of 2013, with base business sales up 9% for the period. Increased replacement and remodel activity led our base business growth, as evidenced by double-digit sales growth in building materials and equipment, primarily in our largest year-round markets. Approximately 2% of our sales growth reflected a change in the timing of customer early buy purchases, which effectively shifted sales into the first quarter of 2014 that have historically occurred in the second quarter. This change enables our customers to better position themselves to meet demand during the 2014 season, but alters the year over year comparability of our first and second quarter results.

Gross profit for the first quarter of 2014 increased 9% versus the same period in 2013. Gross profit as a percentage of net sales (gross margin) declined 20 basis points to 28.1% in the first quarter of 2014. The shift in customer early buy purchases negatively impacted first quarter gross margin. Excluding this impact, gross margin was essentially flat compared to the first quarter of last year.

Selling and administrative expenses (operating expenses) increased 8% in the first quarter of 2014 compared to the same period in 2013, with base business operating expenses up 7% for the period. This increase primarily reflects incremental costs to support our first quarter net sales growth, inflationary cost increases, higher outside professional fees and increased costs due to the expansion in 2014 of our annual retail marketing event. These increases had a proportionately larger impact on our results given the seasonality of our first quarter sales.

Operating income for the quarter increased 25% compared to the same period in 2013. Operating income as a percentage of net sales (operating margin) was 2.1% for the first quarter of 2014 compared to 1.9% for the same period in 2013.

Net income increased 22% to $4.2 million in the first quarter of 2014 compared to the same period last year. Earnings per share increased by $0.02 to $0.09 per diluted share for the three months ended March 31, 2014.

### Financial Position and Liquidity

Total net receivables at March 31, 2014 increased 12% from March 31, 2013. Our allowance for doubtful accounts balance was $4.8 million at March 31, 2014, a decrease of $0.6 million compared to March 31, 2013. This decrease reflects sustained improvements in our receivable aging categories and collection efforts. Days sales outstanding (DSO) improved between periods to 28.1 days at March 31, 2014 compared to 28.7 days at March 31, 2013.

Net inventory levels increased 7% to $527.3 million at March 31, 2014. The inventory reserve at March 31, 2014 was $7.8 million compared to $8.5 million at March 31, 2013. Our inventory turns, as calculated on a trailing twelve month basis, were 3.4 times both at March 31, 2014 and March 31, 2013.

Total debt outstanding was $324.2 million at March 31, 2014, up 16% compared to March 31, 2013. This increase reflects the expected timing of payments for seasonal inventory purchases that are due in the second quarter.

### Current Trends and Outlook

For a detailed discussion of trends, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Item 7 of our 2013 Annual Report on Form 10-K.

For 2014, we continue to expect sales growth to be in the mid to upper single digits with higher growth rates in refurbishment and replacement related products such as building materials and equipment. During the first quarter, we completed two acquisitions consisting of four sales centers and opened one new location. We plan to open five new sales centers before the close of the 2014 season. We expect these acquisitions and new locations will help broaden our product offerings, expand our reach and add to our sales growth in 2014 and future years. We expect gross profit to grow at approximately the same rate as net sales and gross margin to remain relatively flat throughout 2014.

Although our base business operating expenses grew 7% in the first quarter, we estimate our expense growth rate for the year will be roughly half of our gross profit growth rate. We are faced with the challenge of anticipated growth in our performance-based compensation in 2014 when compared to the prior year. We project that our 2014 performance-based compensation will be $4.0 million to $5.0 million higher than in 2013, most of which is generally recorded in the second and third quarters, consistent with the seasonality of our earnings.

For the full year, we project our effective income tax rate will be approximately 38.5%. Our effective tax rate is dependent upon the results of operations and may change if actual results are different from our current expectations, specifically any significant changes in our geographic mix. We expect the rates for the second and fourth quarters will be slightly above the full year rate, while the third quarter rate should be slightly below the estimated annual rate.

With our expectations for the year largely unchanged, we affirm our previously provided 2014 annual earnings guidance of $2.35 to $2.45 per diluted share. We expect cash provided by operations will be in line with net income for fiscal 2014 and we anticipate that share repurchase activity will be similar to that in 2013.

### RESULTS OF OPERATIONS

As of March 31, 2014, we conducted operations through 325 sales centers in North America, Europe and South America.

The following table presents information derived from the Consolidated Statements of Income expressed as a percentage of net sales:

|  | Three Months Ended March 31, 2014 | 2013 |
| --- | ---: | ---: |
| Net sales | **100.0%** | 100.0% |
| Cost of sales | **71.9** | 71.7 |
| Gross profit | **28.1** | 28.3 |
| Operating expenses | **26.0** | 26.4 |
| Operating income | **2.1** | 1.9 |
| Interest expense, net | **0.5** | 0.4 |
| Income before income taxes and equity earnings | **1.7%** | 1.4% |

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

We have included the results of operations from acquisitions in 2014 and 2013 in our consolidated results since the respective dates of these acquisitions.

### Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

The following table breaks out our consolidated results into the base business component and the excluded component (sales centers excluded from base business):

*(Unaudited)*

*(in thousands)*

|  | Base Business Three Months Ended March 31, 2014 | 2013 | Excluded Three Months Ended March 31, 2014 | 2013 | Total Three Months Ended March 31, 2014 | 2013 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **$404,618** | $370,244 | **$1,726** | $118 | **$406,344** | $370,362 |
| Gross profit | **113,547** | 104,720 | **553** | 41 | **114,100** | 104,761 |
| Gross margin | **28.1%** | 28.3% | **32.0%** | 34.7% | **28.1%** | 28.3% |
| Operating expenses | **104,583** | 97,751 | **871** | 78 | **105,454** | 97,829 |
| Expenses as a % of net sales | **25.8%** | 26.4% | **50.5%** | 66.1% | **26.0%** | 26.4% |
| Operating income (loss) | **8,964** | 6,969 | **(318)** | (37) | **8,646** | 6,932 |
| Operating margin | **2.2%** | 1.9% | **(18.4)%** | (31.4)% | **2.1%** | 1.9% |

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

| Acquired (1) | Acquisition Date | Net Sales Centers Acquired | Periods Excluded |
| --- | --- | ---: | --- |
| DFW Stone Supply, LLC | March 2014 | 2 | March 2014 |
| Atlantic Chemical & Aquatics Inc. | February 2014 | 2 | February - March 2014 |
| B. Shapiro Supply, LLC | May 2013 | 1 | January - March 2014 |
| Swimming Pool Supply Center, Inc. | March 2013 | 1 | January - March 2014 and March 2013 |

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

We exclude sales centers that are acquired, closed or opened in new markets from base business results for a period of 15 months. We also exclude consolidated sales centers when we do not expect to maintain the majority of the existing business and existing sales centers that are consolidated with acquired sales centers. As of March 31, 2014, we excluded one sales center opened in a new market from base business.

We generally allocate corporate overhead expenses to excluded sales centers on the basis of their net sales as a percentage of total net sales. After 15 months of operations, we include acquired, consolidated and new market sales centers in the base business calculation including the comparative prior year period.

The table below summarizes the changes in our sales centers in the first three months of 2014:

|  |  |
| --- | ---: |
| December 31, 2013 | 321 |
| Acquired locations | 4 |
| New locations | 1 |
| Consolidated locations | (1) |
| March 31, 2014 | 325 |

11

### Net Sales

*(in millions)*

|  | Three Months Ended March 31, 2014 | 2013 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **$406.3** | $370.4 | $35.9 | 10% |

Net sales for the first quarter of 2014 increased 10% compared to the first quarter of 2013, including a 9% increase in base business net sales. Increased replacement and remodel activity, primarily in our largest year-round markets, drove our base business sales growth.

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

- continued improvement in consumer discretionary expenditures, including some market recovery in remodeling and replacement activity, as evidenced by sales growth rates for product offerings such as building materials, heaters, pumps and lighting (see discussion below);
- increased construction and renovation activity consistent with the improvements in the housing market, as evidenced by sales growth rates for irrigation systems and landscape equipment product offerings of 8%;
- market share gains attributed to continued improvements in customer service levels;
- a change in the timing of customer early buy purchases, which effectively shifted sales into the first quarter of 2014 that historically have occurred in the second quarter (approximately 2% increase); and
- inflationary product cost increases (estimated at approximately 1% to 2%).

Sales of building materials and tile grew by 20% compared to the first quarter of 2013. Collectively these products accounted for approximately 10% of our total sales. Sales of equipment, which includes heaters, pumps, lighting and filters, increased by 13% compared to the first quarter of 2013. Chemical sales increased by 2% while chemical pricing remained relatively flat.

### Gross Profit

*(in millions)*

|  | Three Months Ended March 31, 2014 | 2013 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Gross profit | **$114.1** | $104.8 | $9.3 | 9% |
| Gross margin | **28.1%** | 28.3% |  |  |

Gross margin for the first quarter of 2014 declined approximately 20 basis points compared to the first quarter of 2013. The shift in customer early buy activity contributed to the decrease in gross margin, as these purchases are primarily comprised of lower margin discretionary products and include applicable discounts. Excluding this impact, gross margin was essentially flat compared to the first quarter of last year.

### Operating Expenses

*(in millions)*

|  | Three Months Ended March 31, 2014 | 2013 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Operating expenses | **$105.5** | $97.8 | $7.7 | 8% |
| Operating expenses as a % of net sales | **26.0%** | 26.4% |  |  |

Operating expenses increased 8% in the first quarter of 2014 compared to the first quarter of 2013, with base business operating expenses up 7% for the period. This increase primarily reflects incremental costs to support our first quarter net sales growth, inflationary cost increases, higher outside professional fees and increased costs due to the expansion in 2014 of our annual retail marketing event. These increases had a proportionately larger impact on our results given the seasonality of our first quarter sales.

### Interest Expense, Net

Interest expense, net increased compared to the first quarter of 2013 as a result of foreign currency exchange losses realized on the settlement of purchases made in foreign currency during the quarter as opposed to interest expense on debt, which was slightly down year over year. Our weighted average effective interest rate decreased to 2.2% for the first quarter of 2014 from 2.6% for the first quarter of 2013 on higher average outstanding debt of $278.2 million versus $245.5 million for the respective periods.

### Income Taxes

Our effective income tax rate was 38.8% for the three months ended March 31, 2014 compared to 35.7% for the three months ended March 31, 2013. Our provision for income taxes for the first quarter of 2014 reflects no discrete or unusual items. In contrast, our provision for the first three months of 2013 included a benefit of $0.2 million related to the temporary lapse in 2012 of the controlled foreign corporation income exclusion.

### Net Income and Earnings Per Share

Net income for the first quarter of 2014 increased 22% to $4.2 million compared to the first quarter of 2013. Earnings per diluted share was $0.09 for the first quarter of 2014, an increase of $0.02 per diluted share over the same period of 2013 .

### 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 maintenance and installation. Sales are substantially lower during the first and fourth quarters, when we may incur net losses. In 2013, we generated approximately 66% of our net sales and essentially 100% of our operating income 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.

The following table presents certain unaudited quarterly data for the first quarter of 2014, the four quarters of 2013 and the second, third and fourth quarters of 2012. 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 our 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)*

*(in thousands)*

| Statement of Income (Loss) Data | QUARTER 2014 First | 2013 Fourth | Third | Second | First | 2012 Fourth | Third | Second |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **$406,344** | $340,789 | $578,157 | $790,392 | $370,362 | $306,818 | $528,027 | $757,175 |
| Gross profit | **114,100** | 95,793 | 162,557 | 228,166 | 104,761 | 88,938 | 151,501 | 222,405 |
| Operating income (loss) | **8,646** | (6,814) | 53,375 | 111,993 | 6,932 | (10,297) | 41,011 | 108,134 |
| Net income (loss) | **4,188** | (4,975) | 32,332 | 66,533 | 3,440 | (7,997) | 21,375 | 64,943 |
| **Balance Sheet Data** |  |  |  |  |  |  |  |  |
| Total receivables, net | **$211,107** | $125,287 | $180,898 | $281,064 | $188,294 | $113,859 | $174,385 | $269,060 |
| Product inventories, net | **527,304** | 429,197 | 365,596 | 424,679 | 494,321 | 400,308 | 349,325 | 402,266 |
| Accounts payable | **370,002** | 214,596 | 142,777 | 239,976 | 338,026 | 199,787 | 163,543 | 267,990 |
| Total debt | **324,226** | 246,418 | 260,432 | 300,426 | 278,542 | 230,882 | 214,328 | 309,813 |

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 begins or in the fourth quarter after the peak selling season ends.

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 Effects |
| --- | --- | --- |
| Hot and dry | • | Increased purchases of chemicals and supplies for existing swimming pools |
|  | • | Increased purchases of above-ground pools and irrigation products |
| Unseasonably cool weather or extraordinary amounts of rain | • | Fewer pool and landscape installations |
|  | • | Decreased purchases of chemicals and supplies |
|  | • | Decreased purchases of impulse items such as above-ground pools and accessories |
| Unseasonably early warming trends in spring/late cooling trends in fall | • | A longer pool and landscape season, thus positively impacting our sales |
| (primarily in the northern half of the U.S. and Canada) |  |  |
| Unseasonably late warming trends in spring/early cooling trends in fall | • | A shorter pool and landscape season, thus negatively impacting our sales |
| (primarily in the northern half of the U.S. and Canada) |  |  |

Similar to last year, the Central and Southeast regions of the United States experienced cooler than normal temperatures in the first quarter of 2014, although temperatures in Florida were normal for this time of year. The West experienced warmer than average temperatures, especially California and Arizona. The Northeast, parts of the Midwest and eastern Canada experienced near record cold temperatures and substantial snowfall. Given the similarity of overall weather conditions in the first quarter of last year and the fact that our busiest season typically does not start until late March or April, weather did not significantly affect sales growth comparisons for the first quarter of 2014.

### 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;
- scheduled debt payments;
- 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 requirements and other general corporate purposes, including acquisitions, dividend payments and share repurchases. Our primary sources of working capital are cash from operations supplemented by borrowings, which have historically been sufficient to support our growth and finance acquisitions. The same principle applies to funds used for capital expenditures and share repurchases.

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;
- strategic acquisitions executed opportunistically; and
- payment of cash dividends as and when declared by our Board of Directors (Board).

As discussed further under the subheading *Future Sources and Uses of Cash* on page 17, we are required to comply with certain financial covenants under our debt agreements, including the maintenance of a maximum average total leverage ratio. Although more conservative than the maximum, we strive to maintain an average total leverage ratio of 1.50 to 2.00. While considering this metric, we also use our cash to repurchase common stock based on Board-defined parameters and to repay our debt.

Capital expenditures have historically averaged 0.5% to 1.0% of net sales. Capital expenditures were 0.9% of net sales in 2013, 0.8% of net sales in 2012 and 1.1% of net sales in 2011. In 2011, following two to three years of limited capacity expansion, capital expenditures were higher than the historical average because we began purchasing rather than leasing new vehicles and forklifts. In 2014, we project annual capital expenditures will be near the high end of our historical range due to our continued investments in new vehicles, equipment and technology.

### Sources and Uses of Cash

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

|  | Three Months Ended March 31, 2014 | 2013 |
| --- | ---: | ---: |
| Operating activities | **$(37,345)** | $(39,986) |
| Investing activities | **(10,333)** | (5,198) |
| Financing activities | **47,789** | 44,533 |

Cash used in operating activities during the first three months of 2014 was consistent with the first three months of 2013. Cash used in investing activities in the first quarter of 2014 included $4.5 million of net payments to fund two acquisitions. The increase in cash provided by financing activities between periods primarily reflects an increase in net borrowings of $30.2 million, offset mostly by greater share repurchases and higher dividend payments.

### Future Sources and Uses of Cash

As amended on September 20, 2013, our Credit Facility provides for $465.0 million in borrowing capacity under a five-year revolving credit facility and 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 Credit Facility may be increased at our request and with agreement by the lenders by up to $75.0 million, to a total of $540.0 million. The Credit Facility matures on September 20, 2018. We intend to use the Credit Facility for general corporate purposes and to fund future growth initiatives.

At March 31, 2014, there was $215.9 million outstanding and $245.9 million available for borrowing under the Credit Facility. We currently have five interest rate swap contracts in place that reduce our exposure to fluctuations in interest rates on the Credit Facility. These swap contracts convert the Credit Facility’s variable interest rate to fixed rates of 1.185% on notional amounts totaling $50.0 million, 1.100% on a notional amount of $50.0 million, 1.050% on a notional amount of $25.0 million and 0.990% on a notional amount of $25.0 million. Interest expense related to the notional amounts under these swaps is based on the fixed rates plus the applicable margin on the Credit Facility. All five swap contracts will terminate on October 19, 2016. The weighted average effective interest rate for the Credit Facility as of March 31, 2014 was approximately 2.1%, excluding commitment fees.

Financial covenants on the Credit Facility include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio, which are our most restrictive financial covenants. As of March 31, 2014, 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 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 the Credit Facility). As of March 31, 2014, our average total leverage ratio equaled 1.44 (compared to 1.40 as of December 31, 2013) and the TTM average total debt amount used in this calculation was $273.4 million.
- *Minimum Fixed Charge Coverage Ratio*. On the last day of each fiscal quarter, our fixed charge ratio must be greater than or equal to 2.25 to 1.00. Fixed Charge Ratio is the ratio of the TTM EBITDAR divided by TTM Interest Expense paid or payable in cash plus TTM Rental Expense (as those terms are defined in the Credit Facility). As of March 31, 2014, our fixed charge ratio equaled 4.31 (compared to 4.29 as of December 31, 2013) and TTM Rental Expense was $49.2 million.

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 (as defined in the Credit Facility), provided no default or event of default has occurred and is continuing, or would result from the payment of dividends. Additionally, we may declare and pay quarterly dividends notwithstanding that the aggregate amount of dividends paid would be in excess of the 50% limit described above so long as (i) the amount per share of such dividends does not exceed the amount per share paid during the most recent fiscal year in which we were in compliance with the 50% limit and (ii) our Average Total Leverage Ratio is less than 3.00 to 1.00 both immediately before and after giving pro forma effect to such dividends. Further, dividends must be declared and paid in a manner consistent with our past practice.

Under the Credit Facility, we may repurchase shares of our common stock provided no default or event of default has occurred and is continuing, or would result from the repurchase of shares, and our maximum average total leverage ratio (determined on a pro forma basis) is less than 2.50 to 1.00. Other covenants include restrictions on our ability to grant liens, incur indebtedness, make investments, merge or consolidate, and sell or transfer assets. Failure to comply with any of our financial covenants or any other terms of the Credit Facility could result in penalty payments, higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.

As entered into on October 11, 2013, our accounts receivable securitization facility (the Receivables Facility) offers us a lower cost form of financing, with a peak seasonal funding capacity of up to $120.0 million between March 1 and August 31 and up to $80.0 million between September 1 and February 28. An additional seasonal facility limit of up to $40.0 million may be available between April 1 and June 30.

The Receivables Facility provides for the sale of certain of our receivables to a wholly owned subsidiary (the Securitization Subsidiary). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain third party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities. Upon payment of the receivables by customers, rather than remitting to the financial institutions the amounts collected, we retain such collections as proceeds for the sale of new receivables until payments become due.

The Receivables Facility contains terms and conditions (including representations, covenants and conditions precedent) customary for transactions of this type. Additionally, an amortization event will occur if we fail to maintain a maximum average total leverage ratio (average total funded debt/EBITDA) of 3.25 to 1.00 and a minimum fixed charge coverage ratio (EBITDAR/cash interest expense plus rental expense) of 2.25 to 1.00.

At March 31, 2014, there was $108.4 million outstanding under the Receivables Facility at a weighted average effective interest rate of 0.9%, excluding commitment fees.

As of March 31, 2014, we were in compliance with all covenants and financial ratio requirements. We believe we will remain in compliance with all covenants and financial ratio requirements throughout the rest of the year. For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of our 2013 Annual Report on 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 April 25, 2014, $69.6 million of the current Board authorized amount under our share repurchase program remained available. We expect to repurchase additional shares on the open market from time to time depending on market conditions. We plan to fund these repurchases with cash provided by operations and borrowings under the credit and receivables facilities.

### CRITICAL ACCOUNTING ESTIMATES

We prepare our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (GAAP), which require 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 of Directors. For a description of our critical accounting estimates that require us to make the most difficult, subjective or complex judgments, please see our 2013 Annual Report on Form 10-K. We have not changed these policies from those previously disclosed.

## Market risk

As filed, 347 characters.

### Interest Rate Risk

There have been no material changes from what we reported in our Annual Report on Form 10-K for the year ended December 31, 2013 that affect fiscal 2014.

### Currency Risk

There have been no material changes from what we reported in our Annual Report on Form 10-K for the year ended December 31, 2013 that affect fiscal 2014.

## Controls and procedures

As filed, 1,535 characters.

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 Securities and Exchange 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 March 31, 2014, 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 March 31, 2014, 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.

## Risk factors

As filed, 173 characters.

There have been no material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.

Filed Apr 30, 2014.
Source: SEC EDGAR, the filing index for accession 0000945841-14-000046. Last ingested by Listed: Nov 2, 2026, 16:44 ET. No prices; not investment advice.