# Pool Corp: Form 10-Q for the period ended Mar 31, 2018

- Company: [Pool Corp](/companies/pool.md) (CIK 945841)
- Form: 10-Q
- Filed: 2018-04-30
- Accepted by EDGAR: Apr 30, 2018, 12:31 ET
- Period: 2018-03-31
- Accession: 0000945841-18-000057
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/945841/000094584118000057/pool-2018331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/945841/000094584118000057/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2018-01-01 to 2018-03-31 | $419.8m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2018-01-01 to 2018-03-31 | $166.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2018-01-01 to 2018-03-31 | $132.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-01-01 to 2018-03-31 | $33.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2018-01-01 to 2018-03-31 | −$1.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-01-01 to 2018-03-31 | $31.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-01-01 to 2018-03-31 | $0.75 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-01-01 to 2018-03-31 | $0.78 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-01-01 to 2018-03-31 | 41,862,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2018-01-01 to 2018-03-31 | −$44.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2018-01-01 to 2018-03-31 | $14.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2018-01-01 to 2018-03-31 | $15.0m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2018-01-01 to 2018-03-31 | $2.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-03-31 | $8.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-03-31 | $1.05bn | us-gaap:AssetsCurrent |
| Total assets | at 2018-03-31 | $1.38bn | us-gaap:Assets |
| Current liabilities | at 2018-03-31 | $534.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-03-31 | $1.13bn | us-gaap:Liabilities |
| Long-term debt | at 2018-03-31 | $547.3m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2018-03-31 | $8.5m | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2018-03-31 | $12.3m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2018-03-31 | $249.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 37,497 characters.

You should read the following discussion in conjunction with Management’s Discussion and Analysis included in our 2017 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, excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in our 2017 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

Following a strong finish to 2017, we generated record sales and income in the first quarter of 2018 despite inclement weather in Texas and seasonal markets, which resulted in a slower than expected start to the 2018 swimming pool season. Pools are opening later than in 2017 in seasonal markets, and remodeling and new pool construction activity has been delayed. We believe that the industry has a strong backlog due to pool owner demand for pool upgrades and remodeling, and we expect deferred sales related to pool openings to shift to the second quarter.

Net sales increased 7% to $585.9 million for the first quarter of 2018 compared to $546.4 million in the first quarter of 2017. We realized base business sales growth of 5%. Strong demand in our year-round markets for discretionary products, like heaters and lighting, led our sales growth in the first quarter of 2018. We estimate unfavorable weather conditions impacted our first quarter net sales by approximately $10 million.

Gross profit increased 8% for the first quarter of 2018 compared to the same period in 2017. Base business gross profit improved 6% over the first quarter of last year. Gross profit as a percentage of net sales (gross margin) increased approximately 20 basis points to 28.3% compared to the first quarter of 2017, reflecting minor product mix differences.

Selling and administrative expenses (operating expenses) increased 8% compared to the first quarter of 2017, with base business operating expenses up 5% over the comparable 2017 period. Higher labor, technology, freight and employee-related insurance costs, partially offset by lower performance-based compensation expenses, contributed to this increase with operating expenses related to acquisitions being a larger than normal factor in the quarter.

Operating income for the first quarter of 2018 increased 8% compared to the same period in 2017. Operating income as a percentage of net sales (operating margin) was 5.7% for both the first quarters of 2018 and 2017. Base business operating income increased 11% and base business operating margin improved 40 basis points compared to the first quarter of 2017.

Both Accounting Standards Update (ASU) 2016-09, *Improvements to Employee Share-Based Payment Accounting*, which we adopted on January 1, 2017, and U.S. tax reform enacted in December 2017 impacted our income tax provision for the first quarter of 2018. We recorded a $9.0 million benefit from ASU 2016-09 for the three months ended March 31, 2018, which was $3.6 million or $0.09 per diluted share more than we had previously expected, and also up compared to $5.5 million realized in the same period last year. Our effective tax rate was (4.3)% and 18.7% for the first quarters of 2018 and 2017, respectively, and excluding the benefit from ASU 2016-09, 25.7% and 38.8%, respectively, primarily reflecting the lower corporate income tax rate enacted as part of U.S. tax reform. Going forward, primarily due to the impact of tax reform, we expect our annual effective tax rate (excluding the benefit from ASU 2016-09) to approximate 25.5%, which is a reduction compared to our historical rate of approximately 38.5%.

Net income attributable to Pool Corporation was $31.3 million in the first quarter of 2018 compared to $22.3 million for the first quarter of 2017. Earnings per share increased 44% to $0.75 per diluted share for the three months ended March 31, 2018 versus $0.52 per diluted share for the same period in 2017. The benefit from ASU 2016-09 increased diluted earnings per share by $0.22 in the first quarter of 2018 and $0.12 in the first quarter of 2017. Excluding the impact from ASU 2016-09, earnings per diluted share increased 33% to $0.53 for the first quarter of 2018 compared to $0.40 for the first quarter of 2017.

References to product line and product category data throughout this report generally reflect data related to the North American swimming pool market, as it is more readily available for analysis and represents the largest component of our operations.

### Financial Position and Liquidity

Total net receivables, including pledged receivables, increased 8% from March 31, 2017, including a 1% increase from acquisitions. Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 30.1 days at March 31, 2018, an increase from 29.8 days at March 31, 2017. Our allowance for doubtful accounts balance was $4.0 million at March 31, 2018 and $4.2 million at March 31, 2017.

Net inventory levels grew 9% compared to levels at March 31, 2017. The inventory reserve was $7.4 million at March 31, 2018 and $7.3 million at March 31, 2017. Our inventory turns, as calculated on a trailing four quarters basis, were 3.5 times at both March 31, 2018 and March 31, 2017.

Total debt outstanding at March 31, 2018 was $568.1 million, an increase of $77.9 million, or 16%, compared to total debt at March 31, 2017, primarily to fund business driven working capital growth, acquisitions and share repurchases over the past 12 months.

### Current Trends and Outlook

For a detailed discussion of trends through 2017, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Item 7 of our 2017 Annual Report on Form 10-K.

As a result of the additional tax benefits realized from ASU 2016-09 in the first quarter of 2018, we are updating our 2018 earnings guidance to a range of $5.45 to $5.70 per diluted share from $5.36 to $5.61 per diluted share. Other than the additional $0.09 per diluted share tax benefit that we did not project in our initial guidance range, our earnings expectations for 2018 remain unchanged.

Consistent with our original 2018 projections, we expect base business sales growth of 6% to 7% for the full year and believe gross margin will be similar to 2017. We expect that the weather impacts, including delayed pool openings and lower construction and remodeling activity, that hindered our first quarter of 2018 results will lend to increased sales growth later in the year. Although we believe the impact from delayed pool openings should benefit the second quarter of 2018, given extended winter weather in April and capacity constraints of our customers, such delayed benefits could extend to the latter part of 2018, resulting in more modest results in the second quarter.

We expect base business operating expenses will grow at a rate that will achieve operating margin improvement of 20 to 40 basis points for the full year 2018 compared to 2017 with potentially more of this operating margin expansion occurring in the back half of the year due to the shift in sales expectations.

Given our $77.9 million increase in debt as of March 31, 2018 over the prior year and the increase in the 30-Day LIBOR, we expect Interest and other non-operating expenses, net for the full year 2018 will increase over 2017. We estimate that interest rates on our debt will increase by approximately 75 basis points over last year.

In 2018, we expect our effective tax rate to approximate 25.5%, which is a reduction from our historical rate of approximately 38.5%, both of which exclude the impact of ASU 2016-09. We have not finalized our accounting for the tax effects of tax reform; however, our estimated effective tax rate is based on reasonable estimates for tax effects from tax reform.

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. Due to ASU 2016-09 requirements, we expect our effective tax rate will fluctuate from quarter to quarter, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse. We recorded a $9.0 million benefit from ASU 2016-09 for the three months ended March 31, 2018, which was $3.6 million or $0.09 per diluted share more than we had previously expected. Additional tax benefits could be recognized related to stock option exercises in 2018 from grants that expire in years after 2018, for which we have not included any expected benefits in our guidance. The estimated impact related to ASU 2016-09 is subject to several assumptions which can vary significantly, including our estimated share price and the periods in which our employees will exercise vested stock options.

We expect cash provided by operations will approximate net income for the 2018 fiscal year, and subject to additional authorization by our Board of Directors, we anticipate that we may use approximately $100.0 million to $150.0 million in cash for share repurchases.

### RESULTS OF OPERATIONS

As of March 31, 2018, we conducted operations through 354 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, 2018 | 2017 |
| --- | ---: | ---: |
| Net sales | **100.0%** | 100.0% |
| Cost of sales | **71.7** | 71.9 |
| Gross profit | **28.3** | 28.1 |
| Operating expenses | **22.6** | 22.4 |
| Operating income | **5.7** | 5.7 |
| Interest and other non-operating expenses, net | **0.6** | 0.7 |
| Income before income taxes and equity earnings | **5.1%** | 5.0% |

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 the acquisitions in 2018 and 2017 in our consolidated results since the acquisition date.

### Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017

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, 2018 | 2017 | Excluded Three Months Ended March 31, 2018 | 2017 | Total Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **$575,110** | $545,484 | **$10,790** | $957 | **$585,900** | $546,441 |
| Gross profit | **162,975** | 153,416 | **3,098** | 205 | **166,073** | 153,621 |
| Gross margin | **28.3%** | 28.1% | **28.7%** | 21.4% | **28.3%** | 28.1% |
| Operating expenses | **128,123** | 122,084 | **4,409** | 539 | **132,532** | 122,623 |
| Expenses as a % of net sales | **22.3%** | 22.4% | **40.9%** | 56.3% | **22.6%** | 22.4% |
| Operating income (loss) | **34,852** | 31,332 | **(1,311)** | (334) | **33,541** | 30,998 |
| Operating margin | **6.1%** | 5.7% | **(12.2)%** | (34.9)% | **5.7%** | 5.7% |

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 |
| --- | --- | ---: | --- |
| Pool Power (1) | January 2018 | 1 | January - March 2018 |
| Chem Quip(1) | December 2017 | 5 | January - March 2018 |
| Intermark | December 2017 | 1 | January - March 2018 |
| E-Grupa | October 2017 | 1 | January - March 2018 |
| Newline Pool Products | July 2017 | 1 | January - March 2018 |
| Lincoln Aquatics (1) | April 2017 | 1 | January - March 2018 |

(1) We acquired certain distribution assets of this company.

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 three months of 2018:

|  |  |
| --- | ---: |
| December 31, 2017 | 351 |
| Acquired location | 1 |
| New locations | 3 |
| Closed location | (1) |
| March 31, 2018 | 354 |

16

### Net Sales

*(in millions)*

|  | Three Months Ended March 31, 2018 | 2017 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **$585.9** | $546.4 | $39.5 | 7% |

Net sales increased 7% in the first quarter of 2018 compared to the first quarter of 2017, with base business sales up 5% for the period. We started the year off strong, but multiple storms in March hindered our customers’ ability to complete projects, and cold temperatures and snow in our seasonal markets delayed pool openings.

The following factors impacted our sales (listed in order of estimated magnitude):

- strong demand for discretionary products, as evidenced by improvements in sales growth rates for product offerings such as building materials and equipment (see discussion below);
- unfavorable weather (described above), demonstrated by 6% sales growth in our four largest markets and 4% sales growth in our seasonal markets;
- sales growth of 10% from irrigation products, which are less impacted by weather; and
- inflationary product cost increases (estimated at close to 1%).

We believe that sales growth rates for certain product offerings, such as building materials and equipment, evidence increased spending in traditionally discretionary areas, such as pool construction and pool remodeling and equipment upgrades. In the first quarter of 2018, sales for equipment, which included swimming pool heaters, pumps, lights and filters, increased approximately 7% compared to the same period last year. These products collectively represented approximately 30% of net sales. Sales of building materials grew 9% compared to the first quarter of 2017 and represented approximately 13% of net sales for the first quarter of 2018.

Sales to customers who service large commercial swimming pool installations such as hotels, universities and community recreational facilities are included in the appropriate existing product categories, and growth in this area is reflected in the numbers above. These sales represented approximately 6% of our consolidated net sales for the first quarter of 2018 and increased 15% compared to the first quarter of 2017.

### Gross Profit

*(in millions)*

|  | Three Months Ended March 31, 2018 | 2017 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Gross profit | **$166.1** | $153.6 | $12.5 | 8% |
| Gross margin | **28.3%** | 28.1% |  |  |

The increase in gross margin between periods reflects minor product mix differences.

### Operating Expenses

*(in millions)*

|  | Three Months Ended March 31, 2018 | 2017 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Operating expenses | **$132.5** | $122.6 | $9.9 | 8% |
| Operating expenses as a % of net sales | **22.6%** | 22.4% |  |  |

Operating expenses increased 8% in the first quarter of 2018 compared to the first quarter of 2017, with base business operating expenses up 5% compared to the same period last year. Higher labor, technology, freight and employee-related insurance costs, partially offset by lower performance-based compensation expenses, contributed to this increase with operating expenses related to acquisitions being a larger than normal factor in the quarter.

### Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the first quarter of 2018 was in line with the first quarter of 2017. Gains from our interest rate swap contracts offset increased interest expense related to our outstanding borrowings, which is the most significant component of Interest and other non-operating expenses, net. Our weighted average effective interest rate increased to 3.0% for the first quarter of 2018 from 2.6% for the first quarter of 2017 on higher average outstanding debt of $515.9 million versus $446.3 million for the respective periods.

### Income Taxes

Our effective income tax rate was a 4.3% benefit for the three months ended March 31, 2018 and an 18.7% provision for the three months ended March 31, 2017. Both ASU 2016-09 and U.S. tax reform impacted our income tax provision for the first quarter of 2018. We recorded a $9.0 million benefit from ASU 2016-09 for the three months ended March 31, 2018, up compared to the $5.5 million benefit realized in the same period last year. Excluding the benefit from ASU 2016-09, our effective tax rate was 25.7% and 38.8%, respectively, mostly reflecting the lower corporate tax rate enacted as part of U.S. tax reform.

### Net Income and Earnings Per Share

Net income attributable to Pool Corporation increased 41% to $31.3 million in the first quarter of 2018 compared to the first quarter of 2017. Earnings per diluted share increased to $0.75 for the first quarter of 2018 versus $0.52 per diluted share for the comparable period in 2017. The benefit from ASU 2016-09 increased diluted earnings per share by $0.22 in the first quarter of 2018 and $0.12 in the first quarter of 2017.

### 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 2017, we generated approximately 62% of our net sales and 83% 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 2018, the four quarters of 2017 and the fourth, third and second quarters of 2016. 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 Data | QUARTER 2018 First | 2017 Fourth | Third | Second | First | 2016 Fourth | Third | Second |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **$585,900** | $510,183 | $743,401 | $988,163 | $546,441 | $445,235 | $691,429 | $918,889 |
| Gross profit | **166,073** | 145,398 | 216,606 | 289,664 | 153,621 | 127,777 | 199,551 | 270,736 |
| Operating income | **33,541** | 17,259 | 81,928 | 154,186 | 30,998 | 9,743 | 74,166 | 142,420 |
| Net income | **31,339** | 25,665 | 48,783 | 94,620 | 22,270 | 2,572 | 44,421 | 85,247 |
| **Balance Sheet Data** |  |  |  |  |  |  |  |  |
| Total receivables, net | **$314,596** | $196,265 | $262,796 | $370,285 | $290,019 | $166,151 | $233,405 | $351,012 |
| Product inventories, net | **703,793** | 536,474 | 484,287 | 542,805 | 647,884 | 486,116 | 455,156 | 493,254 |
| Accounts payable | **467,795** | 245,249 | 209,062 | 273,309 | 465,928 | 230,728 | 199,922 | 265,349 |
| Total debt | **568,110** | 519,650 | 564,573 | 553,480 | 490,217 | 438,042 | 390,189 | 500,606 |

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) |  |  |

### Weather Impacts on 2018 and 2017 Results

Storm activity late in the quarter, as well as cooler than normal temperatures in the first quarter of 2018, inhibited our sales growth. Much of the Atlantic Coast experienced below-average temperatures in March of 2018, while greater storm activity in Texas and the central United States and above average precipitation in California caused pools to open later than in 2017 and delayed construction activity. In contrast, unseasonably mild weather benefited sales in the first quarter of 2017, as Texas and surrounding markets experienced record warm temperatures.

### 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;
- the quality of our receivables;
- acquisitions;
- dividend payments;
- capital expenditures;
- changes in income tax laws and regulations;
- 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 principles apply 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, including a modest amount of debt, and returning cash to our shareholders through dividends and share repurchases. Our specific priorities for the use of cash are as follows:

- capital expenditures primarily for maintenance and growth of our sales center structure, technology-related investments and fleet vehicles;
- 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.

Capital expenditures were 1.4% of net sales in 2017 as we expanded facilities and purchased vehicles to address growth opportunities. Capital expenditures were 1.4 % of net sales in 2016 and 1.0% of net sales in 2015. Over the last five years, capital expenditures have averaged roughly 1.0% of net sales. Going forward, we project capital expenditures will approximate this average.

### Sources and Uses of Cash

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

|  | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Operating activities | **$(44,149)** | $(32,424) |
| Investing activities | **(15,217)** | (19,119) |
| Financing activities | **38,205** | 42,466 |

Cash used in operating activities of $44.1 million increased during the first three months of 2018 compared to the first three months of 2017 primarily reflecting earlier payment of certain inventory purchases.

Cash used in investing activities for the first three months of 2018 decreased compared to the first three months of 2017 primarily due to earlier than normal vehicle additions to our fleet in the first three months of last year.

Cash provided by financing activities decreased for the first three months of 2018 compared to the first three months of 2017, which reflects a $3.8 million decrease in amounts provided by net borrowings.

### Future Sources and Uses of Cash

### Revolving Credit Facility

On September 29, 2017, we amended and restated our revolving credit facility (the Credit Faclity). The Credit Facility provides for $750.0 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 $825.0 million. The Credit Facility matures on September 29, 2022. We intend to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.

At March 31, 2018, there was $388.8 million outstanding, a $4.2 million standby letter of credit outstanding and $357.0 million available for borrowing 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 March 31, 2018, we have three interest rate swap contracts in place that became effective on October 19, 2016. These swap contracts were previously forward-starting and were amended in October 2015 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. Now effective, these amended swap contracts 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. 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. These interest rate swap contracts 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 at that time. 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 March 31, 2018 was approximately 3.1%, 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. As of March 31, 2018, 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, 2018, our average total leverage ratio equaled 1.67 (compared to 1.63 as of December 31, 2017) and the TTM average total debt amount used in this calculation was $544.1 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, 2018, our fixed charge ratio equaled 5.46 (compared to 5.53 as of December 31, 2017) and TTM Rental Expense was $55.3 million.

On January 1, 2019, we will adopt ASU 2016-02, *Leases,* which will require that we record most of our leases on our balance sheets, but we expect to recognize expenses in a manner similar to current guidance. Our Credit Facility agreement requires that we calculate our financial covenants by excluding the effects of the new standard. We do not expect ASU 2016-02 will have a material impact on our financial covenant calculations.

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.

### Receivables Securitization Facility

Our two-year accounts receivable securitization facility (the Receivables Facility) offers us a lower cost form of financing, with a peak funding capacity of up to $255.0 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 $80.0 million to $220.0 million throughout the remaining months of the 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 March 31, 2018, there was $160.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 2.6%, excluding commitment fees.

As of March 31, 2018, we were in compliance with all covenants and financial ratio requirements under our Credit Facility and our Receivables Facility. 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 2017 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, 2018, $50.6 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 2017 Annual Report on Form 10-K. We have not changed these policies from those previously disclosed.

### Recent Accounting Pronouncements

See Note 1 of “Notes to Consolidated Financial Statements,” included in Item 1 of this Form 10-Q for detail.

## Market risk

As filed, 708 characters.

### Interest Rate Risk

There have been no material changes during the three months ended March 31, 2018 from what we reported in our 2017 Annual Report on Form 10-K. For additional information on our interest rate risk, refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Part II, Item 7A. in our 2017 Annual Report on Form 10-K.

### Currency Risk

There have been no material changes during the three months ended March 31, 2018 from what we reported in our 2017 Annual Report on Form 10-K. For additional information on our currency risk, refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Part II, Item 7A. in our 2017 Annual Report on Form 10-K.

## 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, 2018, 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, 2018, 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, 141 characters.

There have been no material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” in our 2017 Annual Report on Form 10-K.

Filed Apr 30, 2018.
Source: SEC EDGAR, the filing index for accession 0000945841-18-000057. Last ingested by Listed: Nov 2, 2026, 16:44 ET. No prices; not investment advice.