Pool Corp: Form 10-Q for the period ended Sep 30, 2016

You should read the following discussion in conjunction with Management’s Discussion and Analysis included in our 2015 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 earnings and other financial performance measures, statements of management’s expectations regarding our plans and objectives and industry, general economic and other 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 2015 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 experienced a solid third quarter with results that were slightly better than our expectations. Net sales for the third quarter of 2016 increased 7% to $691.4 million compared to $645.8 million in the third quarter of 2015, with base business sales up 5% for the period. Our sales continue to benefit from stronger consumer discretionary spending as evidenced by our increase in sales of pool construction materials and ancillary equipment and supplies, as consumers continue to invest in enhancing their outdoor living spaces.

Gross profit for the third quarter of 2016 increased 8% compared to the same period last year. Base business gross profit improved 6% over the third quarter of last year. Gross profit as a percentage of net sales (gross margin) increased 40 basis points to 28.9% compared to the third quarter of 2015, reflecting gains from supply chain management initiatives this year compared to last.

Selling and administrative expenses (operating expenses) increased 6% compared to the third quarter of 2015, with base business operating expenses up 3% over the comparable 2015 period. While the overall increase in operating expenses includes expenses from our recent acquisitions, the increase in base business operating expenses was primarily due to higher growth-driven labor and freight expenses.

Operating income for the third quarter increased 13% compared to the same period in 2015. Operating income as a percentage of net sales (operating margin) was 10.7% for the third quarter of 2016 compared to 10.1% in the third quarter of 2015.

Net income attributable to Pool Corporation increased 13% compared to the third quarter of 2015. Earnings per share increased to $1.03 per diluted share for the three months ended September 30, 2016 versus $0.90 per diluted share for the comparable period in 2015.

Financial Position and Liquidity

Total net receivables, including pledged receivables, increased 6% from September 30, 2015. Our allowance for doubtful accounts balance was $3.7 million at September 30, 2016 and $3.5 million at September 30, 2015. Net inventory levels grew 10% compared to levels at September 30, 2015. The inventory reserve was $8.1 million at September 30, 2016 and $8.3 million at September 30, 2015. Our inventory turns, as calculated on a trailing twelve month basis, were 3.6 times at September 30, 2016 and 3.4 times at September 30, 2015. Accrued expenses and other current liabilities at September 30, 2016 include $37.5 million in deferred third quarter estimated tax payments. This deferral was allowed for areas affected by severe storms and flooding in Louisiana, and the payments will be made in the fourth quarter of 2016.

Total debt outstanding at September 30, 2016 was $390.2 million, a $3.2 million, or 1% decrease compared to total debt at September 30, 2015.

Current Trends and Outlook

For a detailed discussion of trends through 2015, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Item 7 of our 2015 Annual Report on Form 10-K.

As we move into our traditionally slower fourth quarter, we are mindful of the favorable weather conditions in the fourth quarter of 2015 that extended last year’s pool season in certain seasonal markets. We also have one less selling day in the fourth quarter of 2016 compared to the fourth quarter of 2015. Considering this and our performance to date, we expect to achieve overall base business sales growth of 6% to 7% for the full year 2016, with low single digit sales growth in the fourth quarter. With the gains already realized this year, we expect that gross margin for 2016 will be 20 to 30 basis points better than gross margin for 2015.

For the full year, we expect our operating expense growth rate will be approximately half the rate of our gross profit growth, reflecting our expense discipline, inflationary increases and incremental costs to support our sales growth expectations.

We expect that our 2016 effective tax rate will be consistent with last year. 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. As a result of these factors, our total income tax provision may also fluctuate on a quarterly basis.

Factoring in all of the above variables, we updated our 2016 earnings guidance to a range of $3.40 to $3.46 per diluted share, from our previously disclosed range of $3.30 to $3.45 per diluted share. We expect cash provided by operations will exceed net income for the 2016 fiscal year. Through September 30, 2016, we have spent $115.3 million to purchase shares of our common stock on the open market. We anticipate that we may use approximately $150.0 million to $200.0 million in cash to fund share repurchases during the year.

RESULTS OF OPERATIONS

As of September 30, 2016, we conducted operations through 346 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:

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

We have included the results of operations from acquisitions in 2016 and 2015 in our consolidated results since the respective acquisition dates.

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

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)

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

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

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 summarizes the changes in our sales center count during the first nine months of 2016:

14

Net Sales

(in millions)

Net sales for the third quarter of 2016 increased 7% compared to the third quarter of 2015, with base business sales up 5% for the period. The following factors impacted our sales growth (listed in order of estimated magnitude):

• continued improvement in consumer discretionary expenditures, including some market recovery in remodeling and replacement activity as consumers invest in enhancing outdoor living spaces (see discussion below);
• market share growth, particularly in building materials and commercial product categories (see discussion below);
• increased chemical sales, our largest product category, up 5% from the same period of last year; and
• inflationary (estimated at approximately 1%) product cost increases.

Sales of building materials and tile grew by 8% compared to the third quarter of 2015. Sales of equipment such as heaters, pumps, filters, chlorinators and lights, increased by 5% compared to the third quarter of 2015. The quarter to date sales growth rates in each of these categories are lower than their year to date growth rates primarily due to weather drivers in Texas. In the third quarter of last year, our sales in Texas benefited as customers aimed to catch up on projects following the heavy rains and flooding in the second quarter of 2015. The extreme rainfall experienced in Texas was not as prevalent in the second quarter of 2016, ultimately resulting in less of a backlog to fill in the third quarter of 2016.

Commercial product sales increased 13% compared to the third quarter of 2015. While this category represented only 3% of our consolidated net sales for the quarter, this growth reflects the increase in resources that we have assigned to this category.

Gross Profit

(in millions)

Gross margin for the third quarter of 2016 increased 40 basis points compared to the third quarter of 2015, largely reflecting gains from supply chain management initiatives this year.

Operating Expenses

(in millions)

Operating expenses increased 6% in the third quarter of 2016 compared to the third quarter of 2015, with base business operating expenses up 3% compared to the same period last year. While the overall increase in operating expenses includes expenses from our recent acquisitions, the increase in base business operating expenses was primarily due to higher growth-driven labor and freight expenses. Our operating expenses also include a $0.6 million goodwill impairment charge related to a previously disclosed at-risk reporting unit in Quebec, Canada. We have been monitoring this location’s results, which came in below expectations at the end of the 2016 pool season. As of September 30, 2016, the remaining goodwill balance for this reporting unit is $1.7 million.

Interest and Other Non-operating Expenses, Net

Interest and other non-operating expenses, net increased $0.5 million compared to the third quarter of 2015. The primary component is interest expense on our borrowings. Our weighted average effective interest rate increased to 2.0% for the third quarter of 2016 from 1.8% for the third quarter of 2015 on higher average outstanding debt of $426.7 million versus $403.7 million for the respective periods.

Income Taxes

Our effective income tax rate of 37.7% for the three months ended September 30, 2016 was comparable with our 37.6% effective income tax rate for the three months ended September 30, 2015. Our third quarter effective income tax rate is typically lower compared to other quarters. This is primarily due to the impact of the timing of our accounting for uncertain tax positions, including the expiration of statutes of limitations.

Net Income and Earnings Per Share

Net income attributable to Pool Corporation for the third quarter of 2016 increased 13% to $44.5 million compared to the third quarter of 2015. Earnings per diluted share increased to $1.03 for the third quarter of 2016 versus $0.90 per diluted share for the comparable period in 2015.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

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)

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

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

For a more detailed explanation of how we calculated base business results and a summary of the changes in our sales centers since December 31, 2015, please refer to page 14 under the heading Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015.

Net Sales

(in millions)

Net sales for the first nine months of 2016 increased 9% compared to the same period last year, with much of this growth resulting from the 7% improvement in base business sales. Warmer than normal weather across our seasonal markets kicked off 2016, allowing for accelerated pool openings and increased ability for customers to perform remodel, replacement and new construction activity earlier in the year. Strong execution, combined with neutral weather conditions in the second and third quarters and generally favorable industry conditions, supported our sales growth.

The following factors contributed to our sales growth (listed in order of estimated magnitude):

• continued improvement in consumer discretionary expenditures, including some market recovery in remodeling and replacement activity (see discussion below);
• overall warmer and drier weather in most of our seasonal markets during the first quarter of 2016, contributing to chemical sales growth of 6% and double digit sales growth in our filter and automatic pool cleaner product categories compared to the first nine months of 2015;
• market share growth, particularly in building materials and commercial product categories; and
• inflationary (estimated at approximately 1%) product cost increases.

Sales of building materials and tile grew by 11% compared to the first nine months of 2015. Our sustained growth in building materials primarily reflects market share gains, as we continue to work with our customers and suppliers to expand our product offerings, and also reflects the partial recovery in pool remodeling. Sales of equipment such as heaters, pumps, filters, chlorinators and lights, increased by 9% compared to first nine months of 2015 reflecting both the gradual recovery of replacement activity and increased demand for higher-priced, more energy-efficient products.

Commercial product sales, which represented only 3% of our consolidated net sales for first nine months of 2016, increased 17% compared to the first nine months of 2015 as we have increased the resources assigned to this category.

Gross Profit

(in millions)

Gross margin for the nine months ended September 30, 2016 increased approximately 30 basis points largely benefiting from improvements in supply chain management and internal pricing initiatives as well as the favorable product mix from pool openings earlier in the year. These favorable impacts were partially offset by an increase in customer early buy deliveries, as these sales include applicable discounts.

Operating Expenses

(in millions)

For the first nine months of 2016, operating expenses were up 6% over the same period last year, with base business operating expenses up 4%. While the overall increase in operating expenses includes expenses from our recent acquisitions, the increase in base business operating expenses was primarily due to higher growth-driven labor and freight expenses. By focusing on efficiencies and leveraging existing infrastructure, we were able to reduce operating expenses as a percentage of sales.

Interest and Other Non-operating Expenses, Net

Interest and other non-operating expenses, net for the first nine months of 2016 increased $3.6 million compared to the same period last year. This increase includes $2.0 million in adjustments related to a non-operating note receivable. The remainder of the increase relates to interest expense on our borrowings. Our weighted average effective interest rate increased to 2.0% for the first nine months of 2016 from 1.8% for the same period of 2015 on higher average outstanding debt of $437.3 million versus $394.1 million for the respective periods.

Income Taxes

Our effective income tax rate was 38.2% for the nine months ended September 30, 2016 compared to 38.5% for the nine months ended September 30, 2015. The decline in our effective income tax rate is primarily the result of improved performance by our international entities and a lower impact from permanent items on the estimated higher pre-tax income base for 2016.

Net Income and Earnings Per Share

Earnings per share for the first nine months of 2016 increased to $3.39 per diluted share on Net income attributable to Pool Corporation of $146.3 million, compared to $2.83 per diluted share on Net income attributable to Pool Corporation of $125.8 million in the comparable 2015 period.

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 2015, we generated approximately 63% of our net sales and 90% 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, second and third quarters of 2016, the four quarters of 2015, and the fourth quarter of 2014. 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)

(1) For all periods presented, total debt balances have been adjusted to reflect our adoption of ASU 2015-03. For additional information, see Note 1 of “Notes to Consolidated Financial Statements,” included in Item 1 of this Form 10-Q.

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 Impacts on 2016 and 2015 Results

Similar to last quarter, weather conditions in the third quarter of 2016 varied throughout the United States creating a neutral overall impact on our results. The eastern half of the country experienced above average temperatures in the third quarter of 2016, including record high temperatures in the Northeast and parts of the Midwest. The western half of the United States experienced mostly normal temperatures in the third quarter of 2016, while Texas experienced above average precipitation. The conditions in Texas in the third quarter were in direct contrast to the weather in the same period last year when Texas was drying out from heavy precipitation, which lifted third quarter 2015 sales. California and the Northwest logged drier than normal conditions in the third quarter of 2016 compared to average precipitation last year.

In the second quarter of 2016, the Midwest and Northeast experienced more favorable conditions compared to 2015, with above average temperatures and much drier weather in June 2016 compared to June 2015. Although the extreme rainfall experienced in Texas and adjacent states was not as prevalent in the second quarter of 2016 as compared to 2015, Texas experienced above average precipitation yet another year. Florida and the Southeast experienced cooler temperatures compared to above average and record heat in certain areas last year. California and the Northwest experienced warm temperatures and normal levels of precipitation in the second quarter of both years.

Warmer than normal weather across nearly all markets in the United States benefited our first quarter of 2016 sales growth. Warmer weather early in the season accelerates pool openings and allows for increased purchases of chemicals and maintenance supplies for existing pools. By comparison, our year-round markets experienced similar favorable weather conditions in the first quarter of last year, while our seasonal markets, particularly in the northeast United States and eastern Canada, experienced cooler than normal temperatures in 2015. The unusually early warm weather in the first quarter of 2016 in our seasonal markets benefited our first quarter sales. Growth in our California markets in the first quarter of 2016 was impacted by unfavorable weather comparisons to the same period of 2015 due to higher winter precipitation and average temperatures in 2016 versus record warm temperatures in 2015.

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);
• repayment of debt to maintain an average total leverage ratio (as defined below) between 1.5 and 2.0; and
• repurchases of our common stock under our Board authorized share repurchase program.

Over the last five years, capital expenditures have averaged roughly 1.0% of net sales. Capital expenditures were 1.0% of net sales in 2015, 0.8% of net sales in 2014 and 0.9% of sales in 2013. Going forward, we project capital expenditures will be 1.0% to 1.5% of net sales as we expand facilities and purchase delivery vehicles to address growth opportunities.

Sources and Uses of Cash

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

Cash provided by operating activities of $143.2 million improved during the first nine months of 2016 compared to the first nine months of 2015 primarily due to our net income growth and the deferral of our third quarter estimated tax payments as allowed for areas affected by severe storms and flooding in Louisiana.

Cash used in investing activities for the first nine months of 2016 increased compared to the first nine months of 2015 mostly due to our second quarter 2016 acquisition of Metro Irrigation Supply Company Ltd. as well as higher capital expenditures for vehicle additions in the first nine months of this year.

Cash used in financing activities increased between periods, which reflects a $27.6 million increase in amounts used for share repurchases and a $5.0 million increase in dividends paid to shareholders during the first nine months of 2016 compared to the first nine months of 2015.

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, 2020. We intend to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.

At September 30, 2016, there was $280.1 million outstanding, $180.9 million available for borrowing and a $4.0 million standby letter of credit outstanding under the Credit Facility. We utilize interest rate swap contracts and forward-starting interest rate swap contracts to reduce our exposure to fluctuations in variable interest rates for future interest payments on the Credit Facility. As of September 30, 2016, we had five interest rate swap contracts in place. These swap contracts convert the Credit Facility’s variable interest rate to fixed rates of 1.185% on two separate notional amounts of $25.0 million each, 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 swap contracts is based on the fixed rates plus the applicable margin on the Credit Facility. All five swap contracts terminated on October 19, 2016.

We also have three forward-starting interest rate swap contracts in place that were amended in October 2015. These swaps were amended to bring the fixed rates per our forward-starting contracts in line with current market rates and extend the hedged period for future interest payments on our Credit Facility. As amended, these new swap contracts will convert the Credit Facility’s variable interest rate to fixed rates of 2.273% on a notional amount of $75.0 million and 2.111% on two separate notional amounts, one $25.0 million and the other $50.0 million, totaling $75.0 million. Each of these forward-starting interest rate swap contracts became effective on October 19, 2016 and will terminate on November 20, 2019. In July 2016 we entered into a forward-starting interest rate swap contract to extend the hedged period for future interest payments on our Credit Facility to its maturity date. This swap contract will convert the Credit Facility’s variable interest rate to a fixed rate of 1.1425% on a notional amount of $150.0 million. The contract becomes effective on November 20, 2019 and terminates on November 20, 2020.

The weighted average effective interest rate for the Credit Facility as of September 30, 2016 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 September 30, 2016, 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 September 30, 2016, our average total leverage ratio equaled 1.51 (compared to 1.54 as of June 30, 2016) and the TTM average total debt amount used in this calculation was $423.3 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 September 30, 2016, our fixed charge ratio equaled 5.50 (compared to 5.43 as of June 30, 2016) and TTM Rental Expense was $52.0 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 $200.0 million between May 1 and June 30, which includes an additional seasonal funding capacity that is available between March 1 and July 31. Other funding capacities range from $55.0 million to $135.0 million throughout the remaining months of the year. We expect to amend this facility in the fourth quarter of 2016 to increase the funding capacity and extend the October 16, 2017 maturity date by one year.

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 September 30, 2016, there was $110.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 1.3%, excluding commitment fees.

As of September 30, 2016, 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 next twelve months. For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of our 2015 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 October 24, 2016, $71.6 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. For a description of our critical accounting estimates that require us to make the most difficult, subjective or complex judgments, please see our 2015 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 (ASU) 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, 2017 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 July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires entities to measure inventory at the lower of cost or net realizable value rather than at the lower of cost or market. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 will be effective for annual periods beginning after December 15, 2016, and early adoption is permitted. We have not elected to early adopt this guidance. We do not expect the adoption of ASU 2015-11 will have a material impact on our financial position, results of operations and related disclosures.

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. ASU 2015-16 will be effective for annual periods beginning after December 15, 2016, and early adoption is permitted. We have not elected to early adopt this guidance. We do not expect the adoption of ASU 2015-16 will have a material impact on our financial position, results of operations and related disclosures.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet rather than separately presenting net deferred tax assets or liabilities as current or noncurrent. Also, companies will no longer allocate valuation allowances between current and noncurrent deferred tax assets because those allowances also will be classified as noncurrent. ASU 2015-17 will be effective for annual periods beginning after December 15, 2016, and early adoption is permitted. We have not elected to early adopt this guidance. We do not expect the adoption of ASU 2015-17 will have an impact on our results of operations, but it will change the presentation of our financial position and disclosures related to deferred tax assets and liabilities.

In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to record most leases on their balance sheets but recognize expenses in a manner similar to current guidance. ASU 2016-02 will be effective for annual periods beginning after December 15, 2018. The guidance is required to be applied using a modified retrospective approach. We are currently evaluating the effect that ASU 2016-02 will have on our financial position, results of operations and related disclosures.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance requires all excess tax benefits or deficiencies to be recognized as income tax expense or benefit in the income statement, and all excess tax benefits to be classified with other income tax cash flows as operating activities. This portion of the amendment should be applied prospectively. The guidance also changes the timing of when excess tax benefits are recognized and the methods available to an entity to estimate the impact of forfeitures related to share-based awards. These two amendment topics should be applied using a modified retrospective transition method, and would require recognition of cumulative-effect adjustments to equity as of the beginning of the period in which the guidance is adopted. The guidance also classifies cash paid by an employer when directly withholding shares for tax-withholding purposes as a financing activity on the statement of cash flows. This portion of the amendment should be applied retrospectively. ASU 2016-09 will be effective for annual periods beginning after December 15, 2016. Early adoption is permitted in any interim or annual period, but we are not early adopting this guidance. The adoption of this guidance may have a material positive impact on our income tax provision, net income and operating cash flows in periods in which employees elect to exercise their vested stock options or restrictions on share-based awards lapse (based on our comparison of our deferred tax assets for share-based compensation to the current intrinsic value of the underlying awards).

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments, which changes the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination for most financing receivables. ASU 2016-13 will be effective for annual periods beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018. We have not elected to early adopt this guidance. The guidance must be applied using a cumulative-effect transition method. We are currently evaluating the effect that ASU 2016-13 will have on our financial position, results of operations and related disclosures.

In September 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, which may change the classification of certain cash receipts and cash payments on an entity’s statement of cash flows. The new guidance specifies how cash flows should be classified for debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds for the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, distributions from equity method investees and beneficial interests in securitization transactions. Current guidance for these topics is principles-based, requiring judgment in application and creating diversity in practice. ASU 2016-15 will be effective for annual periods beginning after December 15, 2017 and must be applied retrospectively. Early adoption is permitted for all entities. We have not elected to early adopt this guidance. We are currently evaluating the effect that ASU 2016-15 will have on our financial position and related disclosures.

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, 2015 that affect fiscal 2016.

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, 2015 that affect fiscal 2016.

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 September 30, 2016, 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 September 30, 2016, 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.

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, 2015.