# Pool Corp: Form 10-Q for the period ended Mar 31, 2015

- Company: [Pool Corp](/companies/pool.md) (CIK 945841)
- Form: 10-Q
- Filed: 2015-04-30
- Accepted by EDGAR: Apr 30, 2015, 12:54 ET
- Period: 2015-03-31
- Accession: 0000945841-15-000078
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/945841/000094584115000078/pool-2015331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/945841/000094584115000078/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-01-01 to 2015-03-31 | $450.4m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2015-01-01 to 2015-03-31 | $325.6m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2015-01-01 to 2015-03-31 | $124.8m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2015-01-01 to 2015-03-31 | $109.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2015-01-01 to 2015-03-31 | $15.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2015-01-01 to 2015-03-31 | $5.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-01-01 to 2015-03-31 | $8.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-01-01 to 2015-03-31 | $0.19 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-01-01 to 2015-03-31 | $0.19 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-01-01 to 2015-03-31 | 44,756,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2015-01-01 to 2015-03-31 | −$57.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2015-01-01 to 2015-03-31 | $8.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2015-01-01 to 2015-03-31 | $9.6m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2015-01-01 to 2015-03-31 | $8.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2015-03-31 | $5.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-03-31 | $817.2m | us-gaap:AssetsCurrent |
| Total assets | at 2015-03-31 | $1.08bn | us-gaap:Assets |
| Current liabilities | at 2015-03-31 | $408.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2015-03-31 | $840.0m | us-gaap:Liabilities |
| Long-term debt | at 2015-03-31 | $394.6m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2015-03-31 | $241.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 35,350 characters.

You should read the following discussion in conjunction with Management’s Discussion and Analysis included in our 2014 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 2014 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

We began 2015 with solid first quarter results. Our performance is a positive reflection on both market conditions and our strong position within our industry. Both our strength and our value proposition are unique, given the investments that we have made over the course of many years, most notably in inventory and related systems that enable us to have what our customers need, when and where they need it. This allows us to help our customers succeed because the greater our ability to serve them, the better they can serve their customers.

Net sales for the first quarter of 2015 increased 11% compared to the first quarter of 2014, with base business sales up 10% for the period. Sales growth was driven primarily by increased sales of discretionary replacement and remodel products, particularly building materials and equipment. Consumers continue to invest in their outdoor living spaces, which often include pool and deck refurbishment and newer, more energy-efficient equipment. Similar to 2014, our 2015 customer early buy shipments caused some second quarter sales to shift into the first quarter and accounted for approximately 3% of our first quarter 2015 sales growth. Warmer-than-normal weather in our year-round markets positively impacted pool maintenance sales, but the currency translation impact of the stronger U.S. dollar on our international sales essentially offset this benefit.

Gross profit for the first quarter of 2015 increased 9% versus the same period in 2014. Gross profit as a percentage of net sales (gross margin) declined 40 basis points to 27.7% in the first quarter of 2015. Although a positive impact on our sales, the increase in customer early buy shipments negatively impacted first quarter gross margin, as these sales are primarily comprised of lower margin discretionary products. Excluding this impact, gross margin was essentially flat compared to the first quarter of last year.

Selling and administrative expenses (operating expenses) increased 4% in the first quarter of 2015 compared to the same period in 2014, with base business operating expenses up 1% for the period. The stronger U.S. dollar relative to foreign currencies favorably impacted our operating expenses by approximately 2%.

Operating income for the quarter increased 80% compared to the same period in 2014. Operating income as a percentage of net sales (operating margin) was 3.5% for the first quarter of 2015 compared to 2.1% for the same period in 2014.

Net income attributable to Pool Corporation increased 101% to $8.4 million in the first quarter of 2015 compared to the same period last year. Earnings per share increased by $0.10, or 111%, to $0.19 per diluted share for the three months ended March 31, 2015.

### Financial Position and Liquidity

Total net receivables, including pledged receivables, increased 13% from March 31, 2014. The increase in our net receivables primarily reflects our sales growth as well as an additional day in our March billing cycle this year versus last year. Our receivables quality remains high, with days sales outstanding (DSO), as calculated on a trailing twelve month basis, of 28.9 days at March 31, 2015 compared to 28.1 days at March 31, 2014. Our allowance for doubtful accounts balance was $4.1 million at March 31, 2015 compared to $4.8 million at March 31, 2014.

Net inventory levels increased 6% to $559.3 million at March 31, 2015. The inventory reserve was $7.2 million at March 31, 2015 and $7.8 million at March 31, 2014. Our inventory turns, as calculated on a trailing twelve month basis, were 3.4 times at both March 31, 2015 and March 31, 2014.

Total debt outstanding of $394.6 million at March 31, 2015 increased 22% compared to March 31, 2014 primarily due to timing differences in the inventory purchase and payment cycle.

### Current Trends and Outlook

For a detailed discussion of trends through 2014, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Item 7 of our 2014 Annual Report on Form 10-K.

Our projection of 2015 sales growth remains 6% to 8%, driven primarily by expectations of higher sales growth from replacement and remodel products such as building materials and equipment. Our first quarter sales benefited from a shift in the timing of customer early buy shipments from the second quarter to the first quarter. We expect an opposite impact on our second quarter sales, with a lower growth rate in the second quarter compared to the rest of the year. This shift does not have an impact on our expectations for the full year 2015. The U.S. dollar has strengthened against most major currencies over the last year. Based on current exchange rates, we expect an adverse impact on our reported sales of approximately 1% for the year from currency translation. We plan to modestly broaden our presence in 2015 by opening five to seven new sales centers and through selective acquisitions as opportunities arise. We expect the full year 2015 gross margin to be relatively flat compared to 2014.

Overall, we anticipate operating expenses will grow at approximately half the rate of our gross profit growth in 2015, reflecting inflationary increases and incremental costs to support our sales growth expectations. If foreign currency exchange rates relative to the U.S. dollar do not change, we expect a 1% to 2% benefit on our expense growth, but little impact on our bottom line results.

For the full year 2015, we project our effective income tax rate will approximate 39.0%. Our effective tax rate is dependent upon our results of operations and may change if actual results are different from our current expectations, particularly 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 2015 annual earnings guidance of $2.72 to $2.87 per diluted share. We expect cash provided by operations will be in line with net income for fiscal 2015 and anticipate that we may use approximately $100.0 million to $150.0 million in cash to fund share repurchases.

### RESULTS OF OPERATIONS

As of March 31, 2015, we conducted operations through 330 sales centers in North America, Europe, South America and Australia.

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

|  | Three Months Ended March 31, 2015 | 2014 |
| --- | ---: | ---: |
| Net sales | **100.0%** | 100.0% |
| Cost of sales | **72.3** | 71.9 |
| Gross profit | **27.7** | 28.1 |
| Operating expenses | **24.2** | 26.0 |
| Operating income | **3.5** | 2.1 |
| Interest expense, net | **0.4** | 0.5 |
| Income before income taxes and equity earnings | **3.0%** | 1.7% |

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 2015 and 2014 in our consolidated results since the respective acquisition dates.

### Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

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, 2015 | 2014 | Excluded Three Months Ended March 31, 2015 | 2014 | Total Three Months Ended March 31, 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **$444,853** | $406,007 | **$5,577** | $337 | **$450,430** | $406,344 |
| Gross profit | **122,634** | 113,966 | **2,167** | 134 | **124,801** | 114,100 |
| Gross margin | **27.6%** | 28.1% | **38.9%** | 39.8% | **27.7%** | 28.1% |
| Operating expenses | **106,630** | 105,311 | **2,572** | 143 | **109,202** | 105,454 |
| Expenses as a % of net sales | **24.0%** | 25.9% | **46.1%** | 42.4% | **24.2%** | 26.0% |
| Operating income (loss) | **16,004** | 8,655 | **(405)** | (9) | **15,599** | 8,646 |
| Operating margin | **3.6%** | 2.1% | **(7.3)%** | (2.7)% | **3.5%** | 2.1% |

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

| Acquired | Acquisition Date | Net Sales Centers Acquired | Periods Excluded |
| --- | --- | ---: | --- |
| St. Louis Hardscape Material & Supply, LLC (1) (2) | December 2014 | 1 | January - March 2015 |
| Pool Systems Pty. Ltd. | July 2014 | 3 | January - March 2015 |
| DFW Stone Supply, LLC (1) | March 2014 | 2 | January - March 2015 and March 2014 |
| Atlantic Chemical & Aquatics Inc. (1) | February 2014 | 2 | January - March 2015 and February - March 2014 |

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

(2) We completed this acquisition on December 31, 2014. We began including this sales center in our sales center count in January 2015, as shown in the table below which summarizes the changes in our sales centers during 2015.

When calculating our base business results, we exclude sales centers that are acquired, closed, or opened in new markets, 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.

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 identifies the changes in the number of sales centers during the first three months of 2015:

|  |  |
| --- | ---: |
| December 31, 2014 | 328 |
| Acquired locations | 1 |
| New locations | 1 |
| Consolidated locations | — |
| March 31, 2015 | 330 |

13

### Net Sales

*(in millions)*

|  | Three Months Ended March 31, 2015 | 2014 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **$450.4** | $406.3 | $44.1 | 11% |

Net sales for the first quarter of 2015 increased 11% compared to the first quarter of 2014, with base business sales up 10% for the period. Demand for discretionary replacement and remodel products led our base business sales growth. Consumers continue to invest in their outdoor living spaces, which often include pool and deck refurbishment and newer, more energy-efficient equipment.

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 and equipment (see discussion below);
- increased customer early buy shipments, which contributed 3% of our sales growth;
- higher sales of maintenance products in our two largest, year-round markets, which we attribute to warmer-than-normal temperatures;
- inflationary (estimated at approximately 1%) product cost increases; offset by
- declines in foreign exchange rates relative to the U.S. dollar, which adversely impacted sales by approximately 1%.

Sales of building materials and tile grew by 17% compared to the first quarter of 2014. Collectively, these products accounted for approximately 11% of our total sales for the quarter. Sales of equipment, which includes heaters, pumps, lighting and filters, increased by 14% compared to the first quarter of 2014. Chemical sales increased by 9% largely due to higher volume in our two largest, year-round markets, which experienced above average temperatures in the first quarter of 2015.

### Gross Profit

*(in millions)*

|  | Three Months Ended March 31, 2015 | 2014 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Gross profit | **$124.8** | $114.1 | $10.7 | 9% |
| Gross margin | **27.7%** | 28.1% |  |  |

Gross margin for the first quarter of 2015 declined approximately 40 basis points compared to the first quarter of 2014. Although a positive impact on our sales, the increase in customer early buy shipments negatively impacted first quarter gross margin, as these sales 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, 2015 | 2014 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Operating expenses | **$109.2** | $105.5 | $3.7 | 4% |
| Operating expenses as a % of net sales | **24.2%** | 26.0% |  |  |

Operating expenses increased 4% in the first quarter of 2015 compared to the first quarter of 2014, with base business operating expenses up 1% for the period. The stronger U.S. dollar relative to foreign currencies favorably impacted our operating expenses by approximately 2%.

### Interest Expense, Net

Interest expense, net increased 3% compared to the first quarter of 2014. Our weighted average effective interest rate decreased to 2.0% for the first quarter of 2015 from 2.2% for the first quarter of 2014 on higher average outstanding debt of $344.9 million versus $278.2 million for the respective periods.

### Income Taxes

Our effective income tax rate was 38.9% for the three months ended March 31, 2015 compared to 38.8% for the three months ended March 31, 2014.

### Net Income and Earnings Per Share

Net income attributable to Pool Corporation for the first quarter of 2015 increased 101% to $8.4 million compared to the first quarter of 2014. Earnings per diluted share was $0.19 for the first quarter of 2015, an increase of $0.10, or 111%, per diluted share over the same period of 2014.

### 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 2014, we generated approximately 65% of our net sales and 96% 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 2015, the four quarters of 2014 and the second, third and fourth quarters of 2013. 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 2015 First | 2014 Fourth | Third | Second | First | 2013 Fourth | Third | Second |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **$450,430** | $376,442 | $615,536 | $848,240 | $406,344 | $340,789 | $578,157 | $790,392 |
| Gross profit | **124,801** | 106,020 | 176,244 | 246,976 | 114,100 | 95,793 | 162,557 | 228,166 |
| Operating income (loss) | **15,599** | (732) | 58,457 | 122,499 | 8,646 | (6,814) | 53,375 | 111,993 |
| Net income (loss) | **8,433** | (1,979) | 34,958 | 73,863 | 4,188 | (4,975) | 32,332 | 66,533 |
| **Balance Sheet Data** |  |  |  |  |  |  |  |  |
| Total receivables, net | **$238,727** | $140,645 | $207,165 | $306,500 | $211,107 | $125,287 | $180,898 | $281,064 |
| Product inventories, net | **559,260** | 466,962 | 414,331 | 451,507 | 527,304 | 429,197 | 365,596 | 424,679 |
| Accounts payable | **375,995** | 236,294 | 154,511 | 233,549 | 370,002 | 214,596 | 142,777 | 239,976 |
| Total debt | **394,559** | 320,838 | 393,738 | 430,971 | 324,226 | 246,418 | 260,432 | 300,426 |

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) |  |  |

In the first quarter of 2015, we benefited from favorable weather in most of our year-round markets, which experienced warmer-than-normal temperatures for this time of year. These warmer temperatures contributed to sales growth in maintenance products, such as chemicals, in these markets. Severe drought conditions continued to afflict California, but had little impact on our first quarter sales. Conversely, the Central, Southeast and Midwest regions of the United States experienced cooler-than-normal temperatures, while the Northeast and eastern Canada experienced another year of near record cold temperatures and substantial snowfall, which inhibited sales growth in these areas.

### 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;
- payment of cash dividends as and when declared by our Board of Directors (Board); and
- repayment of debt or repurchase of our common stock.

As discussed further under the subheading *Future Sources and Uses of Cash* on page 19, 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. Within the constraints of these metrics, we determine the timing and extent to which we will repurchase our common stock under Board authorized repurchase programs and/or repay our debt.

Capital expenditures have historically averaged 0.5% to 1.0% of net sales. Capital expenditures were 0.8% of net sales in 2014, 0.9% of net sales in 2013 and 0.8% of net sales in 2012. Going forward, we project capital expenditures will be near the high end of our historical range due to our continued investment 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, 2015 | 2014 |
| --- | ---: | ---: |
| Operating activities | **$(57,653)** | $(37,345) |
| Investing activities | **(14,523)** | (10,333) |
| Financing activities | **65,688** | 47,789 |

Cash used in operating activities during the first three months of 2015 increased compared to the first three months of 2014 and primarily relates to our accounts receivable growth as well as timing differences in our accounts payable cycle.

Cash used in investing activities for the first three months of 2015 reflects $5.4 million in payments to fund the revolving note under the credit agreement which we entered into as a lender in 2015 and an additional $2.9 million of capital expenditures, offset by a decline in acquisitions payments of $4.2 million as we did not close any acquisitions in the first quarter of 2015. For additional information regarding the revolving note, see Note 1 of our “Notes to Consolidated Financial Statements” included in Item 1 of this Form 10-Q.

The increase in cash provided by financing activities between periods primarily reflects a decrease in cash used for share repurchases of $19.8 million compared to last year.

### Future Sources and Uses of Cash

Our Credit Facility provides for $465.0 million in borrowing capacity under a five-year unsecured 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 November 20, 2019. We intend to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.

At March 31, 2015, there was $280.5 million outstanding and $180.8 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 variable interest rates for future interest payments 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.

In May 2014, we entered into four forward-starting interest rate swap contracts to reduce our exposure to future fluctuations in interest rates on our Credit Facility. These swap contracts will convert the Credit Facility’s variable interest rate to fixed rates of 2.520% on a notional amount of $25.0 million, 2.450% on a notional amount of $50.0 million, 2.339% on a notional amount of $50.0 million and 2.256% on a notional amount of $25.0 million. Each of these forward-starting swap contracts becomes effective on October 19, 2016 and terminates on September 20, 2018.

The weighted average effective interest rate for the Credit Facility as of March 31, 2015 was approximately 1.9%, 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, 2015, 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, 2015, our average total leverage ratio equaled 1.68 (compared to 1.66 as of December 31, 2014) and the TTM average total debt amount used in this calculation was $370.0 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, 2015, our fixed charge ratio equaled 4.76 (compared to 4.63 as of December 31, 2014) and TTM Rental Expense was $49.7 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.

Our two-year Receivables Facility offers us a lower cost form of financing, with a peak funding capacity of up to $140.0 million between May 1 and June 30 and other funding capacities of up to $70.0 million between October 1 and February 28 and up to $120.0 million between March 1 and April 30 and between July 1 and September 30. An additional seasonal borrowing capacity of up to $40.0 million may be available between April 1 and July 31.

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, 2015, there was $114.1 million outstanding under the Receivables Facility at a weighted average effective interest rate of 0.9%, excluding commitment fees.

As of March 31, 2015, we were in compliance with all covenants and financial ratio requirements in our Credit Facility and our Receivables Facility. 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 2014 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 24, 2015, $60.2 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. For a description of our critical accounting estimates that require us to make the most difficult, subjective or complex judgments, please see our 2014 Annual Report on Form 10-K. We have not changed these policies from those previously disclosed.

### Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, *Revenue from Contracts with Customers* (ASU 2014-09), which requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new standard also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. ASU 2014-09 will be effective for annual periods beginning after December 15, 2016 and will replace most existing revenue recognition guidance in U.S. GAAP. The guidance may be applied using either a retrospective or cumulative effect transition method. We are currently evaluating the effect that ASU 2014-09 will have on our financial position, results of operations and related disclosures.

In April 2015, the FASB issued ASU 2015-03, *Simplifying the Presentation of Debt Issuance Costs* (ASU 2015-03), which requires entities to present debt issuance costs as a direct reduction of the carrying amount of the related debt liability rather than as an asset. Amortization of the costs will continue to be recorded as interest expense. ASU 2015-03 will be effective for annual periods beginning after December 15, 2015. We do not expect ASU 2015-03 to have a material impact on our financial position, results of operations and related disclosures.

## 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, 2014 that affect fiscal 2015.

### 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, 2014 that affect fiscal 2015.

## 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, 2015, 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, 2015, 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, 2014.

Filed Apr 30, 2015.
Source: SEC EDGAR, the filing index for accession 0000945841-15-000078. Last ingested by Listed: Nov 2, 2026, 16:44 ET. No prices; not investment advice.