Pool Corp: Form 10-Q for the period ended Jun 30, 2018

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

We had a solid May and June of 2018, following the delayed spring in many of our seasonal markets. Despite weather challenges and seasonal labor capacity constraints on the part of our customers, consumer demand remained high and strongly contributed to our sales and gross profit growth in the second quarter of 2018.

Net sales increased 7% compared to the second quarter of 2017. Base business sales grew 6% over the same quarter of last year, with discretionary products such as building materials and equipment leading our sales growth. The impact of a weaker U.S. dollar on sales outside the U.S., primarily Europe, compared to the same period last year also favorably impacted our sales growth by approximately 1%.

Gross profit increased 7% compared to the second quarter of 2017. Base business gross profit improved 6% over the second quarter of last year. Gross profit as a percentage of net sales (gross margin) was 29.2% in the second quarter of 2018 compared to 29.3% in the second quarter of 2017. Product mix was the principal factor leading to the slightly lower margin.

Selling and administrative expenses (operating expenses) increased 8% compared to the second quarter of 2017, with base business operating expenses up approximately 7% over the comparable 2017 period. While acquisitions contributed to our overall expense growth, changes in non-executive performance-based compensation programs that impact the timing of our expense recognition also resulted in higher compensation expense in the quarter. We believe our results later in the year, particularly in the fourth quarter, should benefit from this timing change. Base business operating expenses also increased due to the unfavorable impact of foreign currency fluctuations, which collectively impacted the quarter’s expenses by 1%. As a percentage of net sales, base business operating expenses were consistent year over year at 13.6%.

Operating income for the second quarter of 2018 increased 5% to $162.0 million compared to the same period in 2017. Foreign currency exchange rate increases favorably impacted our operating income growth by 1%. Operating income as a percentage of net sales (operating margin) was 15.3% for the second quarter of 2018 and 15.6% for the same period in 2017, while base business operating margin was 15.5% for the second quarter of 2018 and 15.7% for the same period in 2017.

Interest and other non-operating expenses, net increased to $6.0 million in the second quarter of 2018 from $4.0 million in the second quarter of 2017. The $2.0 million increase primarily relates to higher interest rates on our debt and increased borrowings to fund working capital investments and share repurchases, as well as greater realized foreign currency conversion losses compared to the same period last year. These losses essentially negated the operating income benefit from changes in foreign currency exchange rates.

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 second quarter of 2018. Our effective tax rate was 25.0% and 37.0% for the second quarters of 2018 and 2017, respectively. We recorded a $1.5 million benefit from ASU 2016-09 in the quarter ended June 30, 2018, compared to a benefit of $1.9 million realized in the same period last year. Excluding the benefits from ASU 2016-09, our effective tax rate was 26.0% and 38.3% for the second quarters of 2018 and 2017, respectively. As previously reported, we expect our annual effective tax rate (excluding the benefit from ASU 2016-09) for 2018 and future periods to approximate 25.5%, which is a reduction compared to our historical rate of approximately 38.5% due to the impact of the recent U.S. tax reform.

Net income attributable to Pool Corporation was $117.0 million in the second quarter of 2018 compared to $94.9 million in the second quarter of 2017. Earnings per share increased 27% to $2.80 per diluted share for the three months ended June 30, 2018 versus $2.21 per diluted share for the same period in 2017. The reduction in our effective tax rate from 37.0% to 25.0% as discussed above reduced our income tax expense by approximately $18.7 million, or $0.45 per diluted share, in the second quarter of 2018.

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

As of June 30, 2018, total net receivables, including pledged receivables, increased 9% compared to June 30, 2017, primarily reflecting our June 2018 sales growth and a 1% increase from acquisitions. Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 30.2 days at June 30, 2018, an increase from 29.6 days at June 30, 2017. Our allowance for doubtful accounts balance was $4.1 million at June 30, 2018 and $3.6 million at June 30, 2017.

Net inventory levels grew 12% compared to levels at June 30, 2017 and include growth from acquired businesses and purchases made in advance of certain mid-year vendor price increases. The inventory reserve was $8.4 million at June 30, 2018 and $8.1 million at June 30, 2017. Our inventory turns, as calculated on a trailing four quarters basis, were 3.5 times at both June 30, 2018 and June 30, 2017.

Total debt outstanding at June 30, 2018 was $657.1 million, an increase of $103.6 million, or 19%, compared to total debt at June 30, 2017. The increased borrowings were primarily used 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.

We continue to project base business sales growth of 6% to 7% for 2018. The extended winter in April benefited our May and June sales, but our customers’ labor capacity constraints further delayed projects. Such delays should allow projects to extend to the second half of 2018 and benefit our sales growth in the remainder of the year. We also expect inflation, which has historically averaged 1% to 2%, to provide a greater contribution to our sales growth in the latter part of 2018 due to product cost increases imposed by our vendors which we intend to pass on. We believe gross margin will be similar to 2017.

We expect base business operating expenses will grow at a rate that will enable us to achieve operating margin improvement of 20 to 40 basis points for the full year 2018 compared to 2017. Changes in non-executive performance-based compensation programs that impact the timing of our expense recognition resulted in higher compensation expense in the first half of 2018, primarily in the second quarter. We believe our results later in the year, particularly in the fourth quarter, should benefit from this timing change. Costs related to labor, fuel and freight continue to rise, but we expect to improve our operating leverage with expected sales contributions as contractors catch up on their backlogs over the second half of the year.

As discussed further in Results of Operations, our average outstanding debt for the six months ended June 30, 2018 increased 18% over the same period last year, and given the increase in the 30-Day LIBOR, our effective interest rate increased approximately 50 basis points over this time period. Based on these trends, we expect Interest and other non-operating expenses, net will increase roughly $2.0 million over the back half of 2018 compared to the same period in 2017.

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 effects of tax reform; however, our estimated effective tax rate is based on reasonable estimates for tax effects from tax reform at this time.

Our effective tax rate is dependent on 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 $10.6 million benefit from ASU 2016-09 for the six months ended June 30, 2018. 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 are updating our 2018 earnings guidance range to $5.50 to $5.70 per diluted share from $5.45 to $5.70 per diluted share, which includes the tax benefits realized from ASU 2016-09 in the first and second quarters of 2018.

We now expect that cash provided by operations will be less than net income for the 2018 fiscal year. As discussed above, in the second quarter of 2018, we made inventory purchases ahead of certain mid-year vendor price increases. We expect an offsetting benefit in 2019 as our purchasing activity normalizes. We anticipate that we may use approximately $100.0 million to $150.0 million in cash for share repurchases in 2018.

RESULTS OF OPERATIONS

As of June 30, 2018, we conducted operations through 358 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 the acquisitions in 2018 and 2017 in our consolidated results since the acquisition dates.

Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 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)

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 six months of 2018:

18

Net Sales

(in millions)

Net sales increased 7% in the second quarter of 2018 compared to the second quarter of 2017, with base business sales up 6% for the period. The quarter started out slow in April, primarily due to unseasonably cold temperatures in most of our seasonal markets, but finished strong in May and June.

The following factors benefited 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);
• market share gains, particularly in building materials and commercial products (see discussion below);
• higher foreign exchange rates, primarily the Euro, compared to the same period last year, which benefited our consolidated net sales growth by 1%;
• inflationary product cost increases (estimated at approximately 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, pool remodeling and equipment upgrades. In the second quarter of 2018, sales for equipment, which includes swimming pool heaters, pumps, lights and filters, increased approximately 8% compared to the same period last year. These products collectively represented approximately 25% of net sales for the period. Sales of building materials grew 12% compared to the second quarter of 2017 and represented approximately 11% of net sales in the second 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 5% of our consolidated net sales for the second quarter of 2018 and increased 8% compared to the second quarter of 2017.

Gross Profit

(in millions)

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

Operating Expenses

(in millions)

Operating expenses increased 8% in the second quarter of 2018 compared to the second quarter of 2017, with base business operating expenses up approximately 7% compared to the same period last year. Changes in non-executive performance-based compensation programs that impact the timing of our expense recognition resulted in higher compensation expense in the second quarter of 2018. Base business operating expenses also increased due to the unfavorable impact of foreign currency fluctuations, which collectively impacted the quarter’s expenses by 1%, and higher costs associated with opening new locations in existing markets over the past 12 months.

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the second quarter of 2018 increased $2.0 million compared to the second quarter of 2017. The increase mostly reflects higher interest expense on our debt, as well as greater realized foreign currency conversion losses compared to the same period last year. Our weighted average effective interest rate increased to 3.2% for the second quarter of 2018 from 2.6% for the second quarter of 2017 on higher average outstanding debt of $626.8 million versus $521.2 million for the respective periods.

Income Taxes

Our effective income tax rate was 25.0% for the three months ended June 30, 2018 and 37.0% for the three months ended June 30, 2017. Both ASU 2016-09 and U.S. tax reform impacted our income tax provision for the second quarter of 2018. We recorded a $1.5 million benefit from ASU 2016-09 in the quarter ended June 30, 2018 compared to a benefit of $1.9 million realized in the same period last year. Excluding the benefits from ASU 2016-09, our effective tax rate was 26.0% and 38.3%, for the second quarters of 2018 and 2017, 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 23% to $117.0 million in the second quarter of 2018 compared to the second quarter of 2017. Earnings per diluted share increased to $2.80 for the second quarter of 2018 versus $2.21 per diluted share for the comparable 2017 period. The reduction in our effective tax rate from 37.0% to 25.0% as discussed above reduced our income tax expense by approximately $18.7 million, or $0.45 per diluted share, in the second quarter of 2018.

Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 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)

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

(1) We acquired certain distribution assets of 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, 2017, please refer to the discussion under the heading Three Months Ended June 30. 2018 Compared to Three Months Ended June 30, 2017.

Net Sales

(in millions)

Net sales for the first six months of 2018 increased 7% compared to the same period last year, with most of this growth resulting from the 6% improvement in base business sales. 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 through April. Our seasonal markets finally warmed up in May 2018, allowing us to serve the pent-up demand and generate solid sales growth in May and June.

The following factors benefited 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);
• market share gains, particularly in building materials and commercial products (see discussion below);
• sales growth of 8% from irrigation products, which are less impacted by weather; and
• inflationary product cost increases (estimated at approximately 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, pool remodeling and equipment upgrades. In the first six months of 2018, sales for equipment, which includes swimming pool heaters, pumps, lights and filters, increased approximately 8% compared to the same period last year. These products collectively represented 27% of net sales in the first half of 2018. Sales of building materials grew 10% compared to the first six months of 2017 and represented approximately 12% of net sales in the first half 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 5% of our consolidated net sales in the first six months of 2018 and increased 11% compared to the same period in 2017.

Gross Profit

(in millions)

Gross margin was consistent the same period of prior year.

Operating Expenses

(in millions)

For the first six months of 2018, operating expenses increased 8% over the same period last year, with base business operating expenses up 6%. Higher costs related to labor, technology, facilities and vehicles contributed to this increase.

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the first six months of 2018 increased $1.9 million compared to the same period last year. The increase mostly reflects higher interest expense on our debt, as well as greater realized foreign currency conversion losses compared to the same period last year. Our weighted average effective interest rate increased to 3.1% for the first six months of 2018 from 2.6% for the same period of 2017 on higher average outstanding debt of $571.3 million versus $483.6 million for the respective periods.

Income Taxes

Our effective income tax rate was 20.3% for the six months ended June 30, 2018 compared to 34.2% for the six months ended June 30, 2017. Both ASU 2016-09 and U.S. tax reform impacted our income tax provision for the first six months of 2018. We recorded a $10.6 million benefit from ASU 2016-09 for the six months ended June 30, 2018 compared to the $7.4 million benefit realized in the same period last year. Excluding the benefits from ASU 2016-09, our effective tax rate was 26.0% and 38.4%, for the six months ended June 30, 2018 and June 30, 2017, 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 27% to $148.4 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Earnings per diluted share increased to $3.55 for the six months ended June 30, 2018 versus $2.73 per diluted share for the six months ended June 30, 2017. The reduction in our effective tax rate from 34.2% to 20.3% as discussed above reduced our income tax expense by approximately $25.9 million, or $0.62 per diluted share, in the first six months of 2018.

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 and second quarters of 2018, the four quarters of 2017 and the third and fourth 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)

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 2018 and 2017 Results

While warming trends started out slow in the second quarter of 2018, the unfavorable weather comparisons turned around by the end of the quarter. With the exception of Florida, where it rained most of May and into June, and California, which generally experienced a cooler-than-usual spring, 2018 results in the last two months of the quarter benefited from the warm weather throughout the country and helped relieve the effects of the slow start from earlier in the year. April 2018 sales struggled as much of the country experienced cold to record cold temperatures this year, in contrast to warm to record warm temperatures last year.

Storm activity, as well as cooler-than-normal temperatures late in the first quarter of 2018, inhibited our first quarter sales growth. Much of the Atlantic Coast experienced below-average temperatures in March of 2018, which caused pools to open later than in 2017, while greater storm activity in Texas and the central United States and above average precipitation in California 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):

Cash used in operating activities decreased $4.5 million during the first six months of 2018 compared to the first six months of 2017 primarily due to higher net income, offset by changes in our working capital. Increased inventory levels and lower income tax accruals in 2018 versus 2017 negatively impacted our 2018 cash flow, but were largely offset by later invoice payments in accounts payable.

Cash used in investing activities for the first six months of 2018 decreased compared to the first six months of 2017 primarily due to earlier-than-normal vehicle additions to our fleet in the first six months of last year as well as the Lincoln Aquatics acquisition that occurred in the second quarter of 2017.

Cash provided by financing activities decreased for the first six months of 2018 compared to the first six months of 2017, which reflects additional share repurchases of $30.2 million offset by a $21.9 million increase in amounts provided by net borrowings.

Future Sources and Uses of Cash

Revolving Credit Facility

Our 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 June 30, 2018, there was $419.4 million outstanding, a $4.8 million standby letter of credit outstanding and $325.8 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 June 30, 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 June 30, 2018 was approximately 3.2%, 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 June 30, 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 June 30, 2018, our average total leverage ratio equaled 1.72 (compared to 1.67 as of March 31, 2018) and the TTM average total debt amount used in this calculation was $572.4 million.
• Minimum Fixed Charge Coverage Ratio. On the last day of each fiscal quarter, our fixed charge ratio must be greater than or equal to 2.25 to 1.00. Fixed Charge Ratio is the ratio of the TTM EBITDAR divided by TTM Interest Expense paid or payable in cash plus TTM Rental Expense (as those terms are defined in the Credit Facility). As of June 30, 2018, our fixed charge ratio equaled 5.40 (compared to 5.46 as of March 31, 2018) and TTM Rental Expense was $56.1 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 June 30, 2018, there was $217.5 million outstanding under the Receivables Facility at a weighted average effective interest rate of 2.8%, excluding commitment fees.

As of June 30, 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 July 23, 2018, $218.3 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.

Interest Rate Risk

There have been no material changes during the six months ended June 30, 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 six months ended June 30, 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.

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 June 30, 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 June 30, 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.

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.