For a discussion of our base business calculations, see the RESULTS OF
OPERATIONS section below.
In our discussion of results of operations below, adjusted operating income, adjusted net income and adjusted diluted earnings per share for the 2012 and 2011 periods exclude the Goodwill impairment line item on the Consolidated Statements of Income. We have provided these adjusted amounts because we believe it helps investors assess our year-over-year operating performance.
2013 FINANCIAL OVERVIEW
In 2013, we surpassed
$2.0 billionin sales, a fitting accomplishment for our milestone 20th year. We achieved record results, including diluted earnings per share (EPS) of $2.05, despite persistent and challenging external factors. In our business, how we distribute products is as important as what products we distribute. We believe that our success reflects the totality of having the right products, available at the right time, coupled with exceptional service, complemented by innovative programs and tools resulting in the value-add we provide to the marketplace. Net sales for the year ended December 31, 2013increased 6% compared to 2012. Base business sales increased 6%, including a 6% increase from swimming pool product sales and an 11% increase from irrigation and landscape product sales. Base business sales growth reflects market growth, market share gains and the ongoing recovery of discretionary product sales, partially offset by weather driven declines in non-discretionary product sales, primarily in our seasonal markets. For 2013, net sales growth of 11% in our largest, year-round markets tracked well above the 2% growth in our seasonal markets, although this difference lessened as weather comparisons normalized later in the year. Gross profit for the year ended December 31, 2013increased 4% over 2012. Gross profit as a percentage of net sales (gross margin) decreased 60 basis points to 28.4% for 2013. Product, customer and geographic mix changes adversely impacted gross margin in 2013. Product mix changes reflected a shift in consumer spending to certain lower margin, discretionary products such as variable speed pumps, high efficiency heaters, LED lighting products, irrigation systems and landscape equipment, relative to higher margin, non-discretionary products generally associated with basic pool maintenance and repair activity. Additionally, due to the later start to the 2013 season, we experienced higher sales growth rates in our lower margin, year-round markets than in our higher margin, seasonal markets, which negatively impacted gross margins. Selling and administrative expenses (operating expenses) for 2013 increased 2% from 2012. Base business operating expenses increased 2% year over year, as salary and other variable expense increases were partially offset by decreases in performancebased compensation. In the third quarter of 2012, we performed an interim goodwill impairment analysis for our United Kingdomreporting unit and recorded a non-cash goodwill impairment charge equal to the total goodwill carrying amount of $6.9 million, which had a $0.14negative impact on diluted EPS for the year ended December 31, 2012. Operating income for the year improved 14% over 2012 and increased 9% compared to adjusted operating income for 2012. Operating income as a percentage of net sales (operating margin) increased to 8.0% in 2013 compared to 7.4% in 2012. Adjusted operating margin was 7.8% in 2012.
Net income increased 19% compared to 2012, while EPS was up 20% to a record
Financial Position and Liquidity
Cash provided by operations of
$105.1 millionin 2013 was $7.8 millionmore than net income and, combined with $15.5 millionin net proceeds from our revolving line of credit and receivables securitization facility and $21.4 millionin proceeds from stock issued under share-based compensation plans, helped fund the following: quarterly cash dividend payments to shareholders, which totaled $33.8 millionfor the year;
share repurchases in the open market of
net capital expenditures of
Total net receivables increased 10% compared to
Inventory levels grew 7% to
$429.2 millionat December 31, 2013compared to levels at December 31, 2012. Our inventory turns, as calculated on a trailing twelve month basis, were 3.4 times at both December 31, 2013and December 31, 2012.
Total debt outstanding at
Current Trends and Outlook
2013 marked the fourth year of the gradual pool industry recovery following the Great Recession. Despite the sluggish pace of recovery, pent up demand in
North Americafor replacement and refurbishment of existing pools and pool components helped propel industry growth. This growth occurred despite inclement weather throughout many, primarily seasonal markets, which adversely impacted pool openings and demand for maintenance products. Irrigation and landscape markets also benefited from the continuing recovery of single-family home construction markets. The economic downturn between 2007 and 2009 had a significant impact on our industry, driving an approximate 80% reduction in new pool construction in the United Statescompared to peak levels in 2005 and also contributing to more than a 30% decline in replacement and refurbishment activities. While we estimate that new pool construction has increased from a low of roughly 45,000 new units in 2009 to approximately 60,000 new units in 2013, construction levels are still down more than 70% compared to peak levels in 2005 and down approximately 60% from what we consider normal levels. The rebound in our base business sales growth beginning in 2010 reflects continued improvement in consumer discretionary expenditures, higher replacement activities and market share gains given our estimated industry growth of 3% to 5% for 2010 to 2012. Improvements in general external market factors in the United Statesincluding consumer confidence, employment, housing, consumer financing and economic expansion helped support this growth. In 2013, we estimate industry growth dipped temporarily to approximately 1% to 2% given the impact of adverse weather on seasonal markets. Going forward, we believe there is potential for a significant sales recovery due to the build-up of deferred replacement and remodeling activity and our expectation for gradually normalized new pool and irrigation construction levels. We also expect that market conditions in the United Stateswill continue to improve, enabling further recovery of replacement, remodeling and new construction activity to normalized levels over the next 4 to 7 years. We expect that the industry will realize an annual growth rate of approximately 4% to 7% over this time period before reverting back to 3% to 4% annual growth over the longer term. As current economic trends indicate that consumer spending has begun to slowly recover and that construction activities will likely continue to gradually improve, we believe that we are well positioned to take advantage of both the eventual market recovery and the inherent long-term growth opportunities in our industry. For 2014, we expect the macroeconomic environment and the opportunities to realize additional market share gains will be quite similar to 2013. We also anticipate industry growth levels will benefit from an expected return to normal seasonal weather compared to 2013. We project 6% to 8% base business sales growth, including our expectation for average inflationary product cost increases of 1% to 2%. We expect that we will grow market share by providing exceptional customer service throughout our networks, expanding product lines and further penetrating underserved markets. We also expect to modestly expand our pool and irrigation networks by opening seven to nine new locations. We believe our sales growth will be more geographically balanced than 2013 and will continue to be weighted toward sales of discretionary products, resulting in negative to neutral gross margin trends for the full year. Overall, we anticipate expenses will grow at approximately half the rate of our net sales growth in 2014, reflecting inflationary increases and incremental costs to support our sales growth expectations. We expect base business results will generate operating profit growth of 15% or greater in 2014. Based on these expectations, we project that 2014 earnings per share will be approximately $2.35to $2.45per diluted share. We expect cash provided by operations will approximate net income for fiscal 2014 and anticipate that share repurchase activity will be similar to 2013. The forward-looking statements in this Current Trends and Outlook section are subject to significant risks and uncertainties, including changes in the economy and the housing market, the sensitivity of our business to weather conditions, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants, and other risks detailed in Item 1A of this Form 10-K. 19 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
We prepare our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (GAAP), which requires 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. We believe the following critical accounting estimates require us to make the most difficult, subjective or complex judgments.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts based on an estimate of the losses we will incur if our customers do not make required payments. We perform periodic credit evaluations of our customers and typically do not require collateral. Consistent with industry practices, we generally require payment from our North American customers within 30 days, except for sales under early buy programs for which we provide extended payment terms to qualified customers. The extended terms usually require payments in equal installments in April, May and June or May and June, depending on geographic location. Credit losses have generally been within or better than our expectations. As our business is seasonal, our customers' businesses are also seasonal. Sales are lowest in the winter months and our past due accounts receivable balance as a percentage of total receivables generally increases during this time. We provide reserves for uncollectible accounts based on our accounts receivable aging. These reserves range from 0.1% for amounts currently due up to 100% for specific accounts more than 60 days past due. At the end of each quarter, we perform a reserve analysis of all accounts with balances greater than
$20,000and more than 60 days past due. Additionally, we perform a separate reserve analysis on the balance of our accounts receivables with emphasis on past due accounts. As we review these past due accounts, we evaluate collectibility based on a combination of factors including:
aging statistics and trends;
customer payment history;
independent credit reports; and
discussions with customers.
During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. These write-offs are charged against our allowance for doubtful accounts. In the past five years, write-offs have averaged approximately 0.2% of net sales annually. Write-offs as a percentage of net sales were 0.1% in 2013, 0.1% in 2012 and 0.2% in 2011. The recent improvement in net write-offs reflects gradually improving external market trends and heightened collection efforts and creditworthiness evaluations. We expect that write-offs will be approximately 0.1% of net sales in 2014. At the end of each fiscal year, we prepare a hindsight analysis by comparing the prior year-end allowance for doubtful accounts balance to (i) current year write-offs and (ii) any significantly aged outstanding receivable balances. Based on our hindsight analysis, we concluded that the prior year allowance was within a range of acceptable estimates and that our reserve methodology is appropriate. If the balance of the accounts receivable reserve increased or decreased by 20% at
December 31, 2013, pretax income would change by approximately $0.9 millionand earnings per share would change by approximately $0.01per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2013). Inventory Obsolescence Product inventories represent the largest asset on our balance sheet. Our goal is to manage our inventory such that we minimize stock-outs to provide the highest level of service to our customers. To do this, we maintain at each sales center an adequate inventory of stock keeping units (SKUs) with the highest sales volumes. At the same time, we continuously strive to better manage our slower moving classes of inventory, which are not as critical to our customers and thus, inherently have lower velocity. Sales centers classify products into 13 classes based on sales at that location over the past 12 months (or 36 months for tile products). 20 -------------------------------------------------------------------------------- All inventory is included in these classes, except for non-stock special order items and products with less than 12 months of usage. The table below presents a description of these inventory classes:
Class 0 new products with less than 12 months usage (or 36 months for tile
Classes 1-4 highest sales value items, which represent approximately 80% of net
sales at the sales center Classes 5-12 lower sales value items, which we keep in stock to provide a high level of customer service Class 13 products with no sales for the past 12 months at the local sales center level, excluding special order products not yet
the customer Null class non-stock special order items There is little risk of obsolescence for products in classes 1-4 because products in these classes generally turn quickly. We establish our reserve for inventory obsolescence based on inventory classes 5-13, which we believe represent some exposure to inventory obsolescence, with particular emphasis on SKUs with the least sales over the previous 12 months. The reserve is intended to reflect the value of inventory that we may not be able to sell at a profit. We provide a reserve of 5% for inventory in classes 5-13 and non-stock inventory as determined at the sales center level. We also provide an additional 5% reserve for excess inventory in classes 5-12 and an additional 45% reserve for excess inventory in class 13. We determine excess inventory, which is defined as the amount of inventory on hand in excess of the previous 12 months' usage, on a company-wide basis. We also evaluate whether the calculated reserve provides sufficient coverage of the total class 13 inventory.
In evaluating the adequacy of our reserve for inventory obsolescence, we consider a combination of factors including:
the level of inventory in relationship to historical sales by product,
including inventory usage by class based on product sales at both the sales center and Company levels;
changes in customer preferences or regulatory requirements;
seasonal fluctuations in inventory levels;
geographic location; and new product offerings. We periodically adjust our reserve for inventory obsolescence as changes occur in the above-identified factors. At the end of each fiscal year, we prepare a hindsight analysis by comparing the prior year-end obsolescence reserve balance to (i) current year inventory write-offs and (ii) the value of products with no sales for the past 12 months that remain in inventory . Based on our hindsight analysis, we concluded that our prior year reserve was within a range of acceptable estimates and that our reserve methodology is appropriate. If the balance of our inventory reserve increased or decreased by 20% at
December 31, 2013, pretax income would change by approximately $1.4 millionand earnings per share would change by approximately $0.02per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2013). Vendor Incentives Many of our vendor arrangements provide for us to receive incentives of specified amounts of consideration when we achieve any of a number of measures. These measures are generally related to the volume level of purchases from our vendors and may include negotiated pricing arrangements. We account for vendor incentives as a reduction of the prices of the vendor's products and therefore a reduction of inventory until we sell the product, at which time such incentives are recognized as a reduction of cost of sales in our income statement. Throughout the year, we estimate the amount of the incentive earned based on our estimate of total purchases for the fiscal year relative to the purchase levels that mark our progress toward earning the incentives. We accrue vendor incentives on a monthly basis using these estimates provided that we determine they are probable and reasonably estimable. Our estimates for annual purchases, future inventory levels and sales of qualifying products are driven by our sales projections, which can be significantly impacted by a number of external factors including weather and changes in economic conditions. Changes in our purchasing mix also impact our incentive estimates, as incentive rates can vary depending on our volume of purchases from specific vendors. 21 -------------------------------------------------------------------------------- We continually revise these estimates throughout the year to reflect actual purchase levels and identifiable trends. As a result, our estimated quarterly vendor incentive accruals may include cumulative catch-up adjustments to reflect any changes in our estimates between reporting periods. These adjustments tend to have a greater impact on gross margin in the fourth quarter since it is our seasonally slowest quarter and because the majority of our vendor incentive arrangements are based on calendar year periods. Our estimates for these arrangements are updated at year end to reflect actual annual purchase levels. In the first quarter of the subsequent year, we prepare a hindsight analysis by comparing actual vendor incentives received to the prior year vendor incentive balances. Based on our hindsight analysis, we concluded that our vendor incentive estimates were within a range of acceptable estimates and that our estimation methodology is appropriate. If market conditions were to change, vendors may change the terms of some or all of these programs. Although such changes would not affect the amounts we have recorded related to products already purchased, they may lower or raise our gross margins for products purchased and sold in future periods.
We record deferred tax assets or liabilities based on differences between the financial reporting and tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when we expect the differences to reverse. Due to changing tax laws and state income tax rates, significant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future. Each year, we prepare a return to provision analysis upon filing our income tax returns. Based on this hindsight analysis, we concluded that our prior year income tax provision was within a range of acceptable estimates and that our provision calculation methodology is appropriate. As of
December 31, 2013, we have not provided for United Statesincome taxes on undistributed earnings of our foreign subsidiaries, as we have invested or expect to invest the undistributed earnings indefinitely. If these earnings are repatriated to the United Statesin the future, or if we determine that the earnings will be remitted in the foreseeable future, additional tax provisions may be required. Determining the amount of unrecognized deferred tax liability on these undistributed earnings is not practicable due to the complexity of tax laws and regulations and the varying circumstances, tax treatments and timing of any future repatriation. We hold, through our wholly owned affiliates, cash balances in the countries in which we operate, including amounts held outside the United States. Most of the amounts held outside the United Statescould be repatriated to the United States, but, under current law, may be subject to United Statesfederal income taxes, less applicable foreign tax credits. Repatriation of some foreign balances is restricted by local laws including the imposition of withholding taxes in some jurisdictions. We have operations in 39 states, 1 United States territory and 10 foreign countries. The amount of income taxes we pay is subject to adjustment by the applicable tax authorities. We are subject to regular audits by federal, state and foreign tax authorities. Our estimate for the potential outcome of any uncertain tax issue is highly judgmental. We regularly evaluate our tax positions, assess the probability of examinations by taxing authorities and incorporate these expectations into our reserve estimates. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, or when statutes of limitation on potential assessments expire. These adjustments may include changes in valuation allowances that we have established. As a result of these uncertainties, our total income tax provision may fluctuate on a quarterly basis.
Incentive Compensation Accrual
Our incentive compensation structure is designed to attract, motivate and retain employees. Our incentive compensation packages include bonus plans that are specific to each group of eligible participants and their levels and areas of responsibility. The majority of our bonus plans have annual cash payments that are based primarily on objective performance criteria, with a component based on management's discretion. We calculate bonuses based on the achievement of certain key measurable financial and operational results, including budgeted operating income and diluted earnings per share. 22 -------------------------------------------------------------------------------- Management sets the objectives for our bonus plans at the beginning of the bonus plan year using both historical information and forecasted results of operations for the current plan year. The Compensation Committee of our Board approves these objectives for certain bonus plans. We record an incentive compensation accrual at the end of each month using management's estimate of the total overall incentives earned based on the amount of progress achieved toward the stated bonus plan objectives. During the third and fourth quarters and as of our fiscal year end, we adjust our estimated incentive compensation accrual based on our detailed analysis of each bonus plan, the participants' progress toward achievement of their specific objectives and management's estimates related to the discretionary components of the bonus plans.
Our quarterly incentive compensation expense and accrual balances may vary relative to actual annual bonus expense and payouts due to the following:
the discretionary components of the bonus plans;
differences between estimated and actual performance; and
our projections related to achievement of multiple-year performance
objectives for our Strategic Plan Incentive Program.
We generally make bonus payments at the end of February following the most recently completed fiscal year. Each year, we compare the actual bonus payouts to amounts accrued at the previous year end to determine the accuracy of our incentive compensation estimates. Based on our hindsight analysis, we concluded that our incentive compensation accrual balance was within a reasonable range of acceptable estimates and that our reserve methodology is appropriate.
Impairment of Goodwill and Other Indefinite-Lived Intangible Assets
Our largest intangible asset is goodwill. At
December 31, 2013, our goodwill balance was $172.0 million, representing approximately 21% of total assets. Goodwill represents the excess of the amount we paid to acquire a company over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. We perform our goodwill impairment test in the fourth quarter of each year or on a more frequent basis if events or changes in circumstances occur that indicate potential impairment. If the estimated fair value of any of our reporting units is below its carrying value, we compare the estimated fair value of the reporting unit's goodwill to its carrying value. If the carrying value of a reporting unit's goodwill exceeds its estimated fair value, we recognize the difference as an impairment loss in operating income. Since we define an operating segment as an individual sales center and we do not have operations below the sales center level, our reporting unit is an individual sales center. As of October 1, 2013, we had 208 reporting units with allocated goodwill balances. The highest goodwill balance was $5.7 millionand the average goodwill balance was $0.8 million. We estimate the fair value of our reporting units based on an income approach that incorporates our assumptions for determining the present value of future cash flows. We project future cash flows using management's assumptions for sales growth rates, operating margins, discount rates and multiples. These estimates can significantly affect the outcome of the impairment test. To determine the reasonableness of the assumptions included in our fair value estimates, we compare the total estimated fair value for all aggregated reporting units to our market capitalization on the date of our impairment test. We also review for potential impairment indicators at the reporting unit level based on an evaluation of recent historical operating trends, current and projected local market conditions and other relevant factors as appropriate. In October 2013, we performed our annual goodwill impairment test and did not identify any goodwill impairment at the reporting unit level. During the third quarter of 2012, we performed an interim goodwill impairment analysis based on our identification of impairment indicators related to our results through the end of the 2012 pool season. As a result of our interim impairment analysis in the third quarter of 2012, we recorded a non-cash goodwill impairment charge of $6.9 millionequal to the total carrying amount of our United Kingdomreporting unit. Based on the magnitude of their goodwill balances and the challenging economic conditions in Europe, we identified our Italyand Spain reporting units as the most at risk for goodwill impairment. Results for certain of our reporting units in Quebec, Canadafell below expectations in 2013, due to weather and other execution challenges, which prompted us to identify one reporting unit as at-risk. We believe our domestic reporting units most at risk for goodwill impairment include one Horizon location in Texas, one Horizon location in Nevadaand one Horizon location in California. As of December 31, 2013, our at-risk reporting units in Europehad an aggregate goodwill balance of $6.4 million, our at-risk reporting unit in Canadahad a goodwill balance of $0.7 millionand our at-risk reporting units in the United Stateshad an aggregate goodwill balance of $3.2 million. 23
-------------------------------------------------------------------------------- If our assumptions or estimates in our fair value calculations change or if operating results are less than forecasted, we could incur additional impairment charges in future periods, especially related to the reporting units discussed above. Impairment charges would decrease operating income, negatively impact diluted EPS and result in lower asset values on our balance sheet. To test the reasonableness of our fair value estimates, we compared our aggregate estimated fair values to our market capitalization as of the date of our annual impairment test. We expect that a reasonable fair value estimate would reflect a moderate acquisition premium. Our fair value estimates fell within 1% of our market capitalization. Our sensitivity analysis, which incorporated more conservative projected cash flow assumptions and fell close to 10% below our market capitalization, resulted in no calculated goodwill impairments. We performed a second sensitivity analysis over our two remaining key fair value assumptions and determined that a 50 basis point increase in our estimated weighted average cost of capital or a 50 basis point decrease in the estimated perpetuity growth rate would generate fair value estimates significantly below our market capitalization, evidencing that our estimates for these assumptions fell at the conservative end of a range of acceptable estimates.
Recent Accounting Pronouncements
We are not aware of any recent accounting pronouncements that will materially impact our Consolidated Financial Statements in future periods.
RESULTS OF OPERATIONS
The table below summarizes information derived from our Consolidated Statements of Income expressed as a percentage of net sales for the past three fiscal years: Year Ended December 31, 2013 2012 2011 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 71.6 71.0 70.4 Gross profit 28.4 29.0 29.6 Operating expenses 20.5 21.3 22.6 Goodwill impairment - 0.4 0.1 Operating income 8.0 7.4 7.0 Interest expense, net 0.3 0.3 0.4
Income before income taxes and equity earnings 7.6 % 7.1 % 6.5 %
Note: Due to rounding, percentages may not add to operating income or income before income taxes and equity earnings.
Our discussion of consolidated operating results includes the operating results from acquisitions in 2013, 2012 and 2011. We have included the results of operations in our consolidated results since the respective acquisition dates.
Fiscal Year 2013 compared to Fiscal Year 2012
The following table breaks out our consolidated results into the base business component and the excluded components (sales centers excluded from base business): (Unaudited) Base Business Excluded Total (in thousands) Year Ended Year Ended Year Ended December 31, December 31, December 31, 2013 2012 2013 2012 2013 2012 Net sales
$ 2,067,579 $ 1,949,035 $ 12,121 $ 4,939 $ 2,079,700 $ 1,953,974Gross profit 588,095 565,932 3,182 1,475 591,277 567,407 Gross margin 28.4 % 29.0 % 26.3 % 29.9 % 28.4 % 29.0 % Operating expenses 421,527 413,626 4,264 1,966 425,791 415,592 Expenses as a % of net sales 20.4 % 21.2 % 35.2 % 39.8 % 20.5 % 21.3 % Goodwill impairment - 6,946 - - - 6,946 Operating income (loss) 166,568 145,360 (1,082 ) (491 ) 165,486 144,869 Operating margin 8.1 % 7.5 % (8.9 )% (9.9 )% 8.0 % 7.4 % 25
-------------------------------------------------------------------------------- We have excluded the following acquisitions from base business for the periods identified: Net Acquisition Sales Centers Periods Acquired (1) Date Acquired Excluded B. Shapiro Supply, LLC May 2013 1 May - December 2013 Swimming Pool Supply March 2013 1 March - December 2013 Center, Inc. CCR Distribution March 2012 1 January - May 2013 and March - May 2012 Ideal Distributors Ltd. February 2012 4 January - April 2013 and February - April 2012 G.L. Cornell Company December 2011 1 January - February 2013 and January - February 2012 Poolway Schwimmbadtechnik November 2011 1 January - February 2013 and GmbH January - February 2012 (1) We acquired certain distribution assets of each of these companies. We exclude sales centers that are acquired, closed or opened in new markets from base business results for a period of 15 months. We also exclude consolidated sales centers when we do not expect to maintain the majority of the existing business and existing sales centers that are consolidated with acquired sales centers. There was one sales center opened in a new market that was excluded from base business as of
December 31, 2013. We generally allocate corporate overhead expenses to excluded sales centers on the basis of their net sales as a percentage of total net sales. After 15 months of operations, we include acquired, consolidated and new market sales centers in the base business calculation including the comparative prior year period.
The table below summarizes the changes in our sales centers during 2013:
December 31, 2012312 Acquired 2 New locations 10 Consolidated locations (3 ) December 31, 2013321
For information about our recent acquisitions, see Note 2 of "Notes to Consolidated Financial Statements," included in Item 8 of this Form 10-K.
Net Sales (in millions) Year Ended December 31, 2013 2012 Change Net sales
$ 2,079.7 $ 1,954.0 $ 125.76% Net sales, as well as base business sales, increased 6% in 2013. The base business sales increase is comprised of a 6% increase from swimming pool product sales and an 11% increase from irrigation product sales. In local currencies, net sales in Europewere relatively flat compared to 2012, reflecting the impact of cold and wet weather conditions on results over the first half of the year, and the effects of the continued difficult economic environment. 26 --------------------------------------------------------------------------------
The principal factors impacting our base business sales growth included the following (listed in order of estimated magnitude):
market share gains attributable to continued improvements in customer
service levels, sales growth rates for certain discretionary product
offerings such as building materials (see discussion below), heaters,
pumps and lighting, and higher base business sales growth for irrigation
systems and landscape equipment due in part to the gradual recovery of the housing market in some of our key states;
challenging weather comparisons in the first half of the year, resulting
in declines in non-discretionary product sales, primarily in our seasonal
markets, supported by continued growth in our largest, year-round markets
and discretionary product sales (for the year, net sales growth of 11% in
our largest, year-round markets tracked well above the 2% growth in our seasonal markets, although this differential narrowed throughout the third and fourth quarters as weather comparisons normalized); and
inflationary product cost increases (estimated at approximately 1% to 2%).
Sales of building materials and tile grew by 20% in 2013 compared to 2012, although collectively these products only accounted for approximately 11% of our total sales. Chemical sales declined by 1.5%, reflecting lower volume due to delayed pool openings compared to 2012, while chemical pricing remained relatively flat. We realized base business sales growth of 2% in the first quarter and 4% in the second quarter, compared to the prior year periods. Throughout the first half of 2013, comparatively difficult weather versus the first half of 2012 suppressed our sales growth. Sales through May of 2012 benefited from unusually favorable weather, especially across the Eastern half of
North America. Record warm temperatures in the Northeast and Midwest United States spurred an earlier than normal start to remodeling projects and new pool construction in the 2012 season. In 2013, later than normal pool openings in our seasonal markets in North Americaand Europefurther added to these challenging comparisons. Weather normalized in the latter half of 2013, leading to base business sales growth of 9% in the third quarter and 11% in the fourth quarter. See discussion of significant weather impacts under the subheading Seasonality and Quarterly Fluctuations beginning on page 32. Gross Profit (in millions) Year Ended December 31, 2013 2012 Change Gross profit $ 591.3 $ 567.4 $ 23.94% Gross margin 28.4 % 29.0 % Gross margin declined approximately 60 basis points from last year. This decrease is primarily due to unfavorable product mix, customer mix and geographic mix as well as competitive pricing pressures. Double-digit sales growth of higher value, lower margin discretionary products such as variable speed pumps, high efficiency heaters, LED lighting products, irrigation systems and landscape equipment positively contributed to sales and gross profit dollars but negatively impacted our margins. This growth outpaced our sales of higher margin, non-discretionary product lines generally associated with basic pool maintenance and repair activity. Additionally, as a result of the slower start to the 2013 season, geographic regions with generally higher margins contributed a proportionally smaller share of our total sales growth.
The following factors collectively impacted gross margin throughout 2013:
changes in our product mix, as discussed in detail above;
growth in sales to larger, lower margin customers, primarily those focused on remodeling and construction activities; higher sales growth rates in our lower margin, year-round markets compared to our seasonal markets;
lower volume incentive rates from certain vendors;
higher credit card fees as a percentage of net sales; and
increased presence of Internet retailers who set low industry reference
prices for certain products.
Year over year, gross margin comparisons fell below the prior year each quarter during 2013, with declines of 60 basis points in the first quarter, 50 basis points in the second quarter, 60 basis points in the third quarter and 90 basis points in the fourth quarter. These declines reflect the changes in product and customer mix discussed above, while geographic mix also contributed to the margin decline in the first and second quarters of 2013. The larger decline in the fourth quarter is due primarily to a more favorable impact on fourth quarter 2012 gross margins from certain vendor incentives. 27 --------------------------------------------------------------------------------
Operating Expenses (in millions) Year Ended December 31, 2013 2012 Change Operating expenses
$ 425.8 $ 415.6 $ 10.22% Operating expenses as a percentage of net sales 20.5 % 21.3 % Operating expenses, as well as base business operating expenses, increased 2% compared to 2012. Increases in overall compensation-related costs, driven by inflationary salary increases and headcount increases to support new sales centers, and higher professional fees were partially offset by a reduction in performance-based compensation.
Interest Expense, net
Interest expense, net for 2013 was consistent with 2012. Average outstanding debt was
$256.1 millionfor 2013 versus $250.3 millionfor 2012. The weighted average effective interest rate declined slightly to 2.4% in 2013 compared to 2.6% in 2012. Income Taxes Our effective income tax rate was 38.80% at December 31, 2013compared to 41.00% at December 31, 2012. Excluding the impact of last year's goodwill impairment charge, our effective income tax rate for 2012 was 39.80%. The impact on the provision from the change in our valuation allowance for foreign net operating losses was 0.57% in 2013 compared to 1.97% in 2012.
Net Income and Earnings Per Share
Net income increased 19% to
$97.3 millionin 2013 compared to $82.0 millionin 2012, while earnings per share increased 20% to $2.05per diluted share compared to $1.71per diluted share in 2012. Excluding the $6.9 million( $0.14per diluted share) impact from the goodwill impairment charge in 2012, net income for 2013 increased 9% over 2012 adjusted net income of $88.9 million, while diluted EPS increased 11% from adjusted diluted earnings per share of $1.85for 2012.
Earnings per share for 2013 also included an accretive impact of approximately
Fiscal Year 2012 compared to Fiscal Year 2011
The following table breaks out our consolidated results into the base business component and the excluded components (sales centers excluded from base business): (Unaudited) Base Business Excluded Total (in thousands) Year Ended Year Ended Year Ended December 31, December 31, December 31, 2012 2011 2012 2011 2012 2011 Net sales
$ 1,910,333 $ 1,787,800 $ 43,641 $ 5,518 $ 1,953,974 $ 1,793,318
Gross profit 555,493 530,002 11,914 1,588 567,407 531,590 Gross margin 29.1 % 29.6 % 27.3 % 28.8 % 29.0 % 29.6 % Operating expenses 401,897 402,709 13,695 2,264 415,592 404,973 Expenses as a % of net sales 21.0 % 22.5 % 31.4 % 41.0 % 21.3 % 22.6 % Goodwill impairment 6,946 1,550 - - 6,946 1,550 Operating income (loss) 146,650 125,743 (1,781 ) (676 ) 144,869 125,067 Operating margin 7.7 % 7.0 % (4.1 )% (12.3 )% 7.4 % 7.0 %
For an explanation of how we calculate base business, please refer to the discussion of base business on page 26 under the heading "Fiscal Year 2013 compared to Fiscal Year 2012".
For purposes of comparing operating results for the year ended
December 31, 2012to the year ended December 31, 2011, we excluded acquired sales centers from base business for the periods identified in the table below. As of December 31, 2012, we also excluded four new market sales center that opened in 2012. Net Acquisition Sales Centers Periods Acquired (1) Date Acquired Excluded CCR Distribution March 2012 1 March-December 2012 Ideal Distributors Ltd. February 2012 4 February-December 2012 G.L. Cornell Company December 2011 1 January-December 2012 and December 2011 Poolway Schwimmbadtechnik GmbH November 2011 1 January-December 2012 and November-December 2011 The Kilpatrick Company, Inc. May 2011 4 January-July 2012 and May-July 2011 Turf Equipment Supply Co. December 2010 3 January-February 2012 and January-February 2011 Pool Boat and Leisure, S.A. December 2010 1 January-February 2012 and January-February 2011
(1) We acquired certain distribution assets of each of these companies.
The table below summarizes the changes in our sales centers during 2012:
December 31, 2011298 Acquired 5 New locations 9 December 31, 2012 312 29
For information about our recent acquisitions, see Note 2 of "Notes to Consolidated Financial Statements," included in Item 8 of this Form 10-K.
Net Sales (in millions) Year Ended December 31, 2012 2011 Change Net sales
$ 1,954.0 $ 1,793.3 $ 160.79% Net sales for 2012 increased 9% compared to 2011, including a 7% increase in base business sales and a 2% increase related to our recent acquisitions and sales centers opened in new markets. Our base business sales growth included a 7% increase on the swimming pool side of the business and a 10% increase on the irrigation side of the business. In local currencies, net sales in Europedeclined approximately 1% in 2012, as modest sales growth in France, our largest European market, offset double digit sales declines in the United Kingdomand sales declines in Spain and Italy.
The principal factors contributing to base business sales growth included the following (listed in order of estimated magnitude):
market share gains attributed to continued improvements in customer
service levels, sales growth rates for certain product offerings such as
building materials and chemicals (see discussion below) and higher base business sales growth for the irrigation side of the business, which included benefits realized from a regional competitor going out of business;
doubledigit sales growth for higher value, lower margin products, such as
variable speed pumps, motorized pool lifts, pool heaters and LED lighting;
continued improvement in consumer discretionary expenditures, including
some market recovery in remodeling activity; the impact of inflationary product cost increases (estimated at approximately 1% to 2%); and
higher sales of non-discretionary products for the refurbishment of the
aging installed base of swimming pools, which we estimate grew 1% over the
past year. Sales of building materials, tile and packaged pool products grew by 16% compared to 2011, although collectively these products only accounted for approximately 12% of our total sales. Chemical sales grew by 5%, with a small benefit overall from price inflation despite some lingering price deflation for certain chemical products.
These sales increases were offset by unfavorable foreign currency fluctuations of approximately 1%.
Our sales performance in 2012 was strongest in the first quarter with 13% base business sales growth, modest in the middle second and third quarters, and solid in the fourth quarter with 12% base business sales growth. Sales benefited from exceptionally favorable weather through May as record warm spring temperatures spawned an early start to the 2012 peak season. However, June and July sales were negatively impacted by unfavorable weather conditions compared to the same period in 2011 and the shift of business into earlier months. See discussion of significant weather impacts under the subheading Seasonality and Quarterly Fluctuations beginning on page 32. Gross Profit (in millions) Year Ended December 31, 2012 2011 Change Gross profit
$ 567.4 $ 531.6 $ 35.87% Gross margin 29.0 % 29.6 % Gross margin decreased 60 basis points between periods, reflecting unfavorable changes in our product and customer mix, competitive pricing pressures and unfavorable comparisons to 2011, which benefited from opportunistic inventory purchases. As discussed above, customer demand shifted somewhat in 2012 to higher value, lower margin products. While this product mix change strongly contributed to 2012 sales and gross profit growth, it negatively impacted gross margin. Additionally, going into the 2011 season, we made greater early buy inventory purchases in advance of year-end vendor price increases and we made additional bulk inventory purchases in advance of mid-year 2011 vendor price increases. These strategic purchases benefited our gross margin throughout 2011. We made more modest early buy inventory purchases going into the 2012 season as vendor price increases were less escalated. 30 -------------------------------------------------------------------------------- Favorable impacts on comparative gross margin included continued improvements in purchasing and pricing discipline and a 10 basis point increase attributed to lower debit card fees as a percentage of net sales as a result of the DoddFrank Wall Street Reform and Consumer Protection Act. Year over year, gross margin comparisons worsened throughout 2012, with declines of 30 basis points in the first quarter, 50 basis points in the second quarter, 70 basis points in the third quarter and 90 basis points in the fourth quarter. The gradual decline reflected the difficult comparison to 2011 due to the timing and amount of inventory purchases, combined with changes in product and customer mix during 2012. Operating Expenses (in millions) Year Ended December 31, 2012 2011 Change Operating expenses $ 415.6 $ 405.0 $ 10.63% Operating expenses as a percentage of net sales 21.3 % 22.6 %
Operating expenses increased 3% compared to 2011. Base business operating expenses remained essentially flat due to the following:
write-off trends. These declines were offset by increases of
$4.1 millionin salaries and wages and $2.1 millionin employee insurance costs primarily due to a 3% increase in average headcount excluding acquisitions. Professional fees also increased by $2.5 million. Interest Expense, net Interest expense, net decreased $1.5 milliondue primarily to the impact of foreign currency transaction gains and losses, with gains of $0.1 millionrecognized in 2012 compared to losses of $0.6 millionrecognized in 2011. Interest expense related to borrowings declined approximately $0.3 millionin 2012 due primarily to a decline in expense on interest rate swap contracts. Average outstanding debt was down 2% compared to 2011 and the weighted average effective interest rate remained flat at 2.6% between periods. In 2011, we realized a $0.3 millionloss related to the early termination of interest rate swap contracts in the fourth quarter.
Our effective income tax rate was 41.00% at
December 31, 2012compared to 38.70% at December 31, 2011. This slightly higher effective income tax rate reflects an increase in our valuation allowance and a small impact due to the temporary lapse of the controlled foreign corporation income exclusion, offset by benefits realized upon the expiration of statutes of limitations for our 2007 income tax returns.
Net Income and Earnings Per Share
Net income increased 14% to
$82.0 millionin 2012, while earnings per share increased 16% to $1.71per diluted share. Excluding the $6.9 million( $0.14per diluted share) impact from the goodwill impairment charge in 2012 and the $1.6 million( $0.03per diluted share) impact from the goodwill impairment charge in 2011, adjusted net income for 2012 increased 21% to $88.9 millionand adjusted earnings per share increased 23% to $1.85per diluted share. Earnings per share for 2012 also included the following: an accretive impact of approximately $0.02per diluted share from the reduction in our weighted average shares outstanding due to our share repurchase activities during the year; and
an unfavorable impact of
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 installations and maintenance. Sales are substantially lower during the first and fourth quarters, when we may incur net losses. In 2013, we generated approximately 66% of our net sales and essentially 100% of our operating income in the second and third quarters of the year. We typically experience a build-up of product inventories and accounts payable during the winter months in anticipation of the peak selling season. Excluding borrowings to finance acquisitions and share repurchases, our peak borrowing usually occurs during the second quarter, primarily because extended payment terms offered by our suppliers typically are payable in April, May and June, while our peak accounts receivable collections typically occur in June, July and August. The following table presents certain unaudited quarterly data for 2013 and 2012. We have included income statement and balance sheet data for the most recent eight quarters to allow for a meaningful comparison of the seasonal fluctuations in these amounts. In our opinion, this information reflects all normal and recurring adjustments considered necessary for a fair presentation of this data. Due to the seasonal nature of our industry, the results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing trends. (Unaudited) QUARTER (in thousands) 2013 2012 First Second Third Fourth First (1) Second (1) Third (1) Fourth Statement of Income Data Net sales
$ 370,362 $ 790,392 $ 578,157 $ 340,789 $ 361,954 $ 757,175 $ 528,027 $ 306,818Gross profit 104,761 228,166 162,557 95,793
104,563 222,405 151,501 88,938 Operating income (loss)
6,932 111,993 53,375 (6,814 )
6,021 108,134 41,011 (10,297 ) Net income (loss) 3,440 66,533 32,332 (4,975 )
3,651 64,943 21,375 (7,997 )
Net sales as a % of annual net sales 18 % 38 % 28 % 16 % 19 % 39 % 27 % 16 % Gross profit as a % of annual gross profit 18 % 39 % 27 % 16 % 18 % 39 % 27 % 16 % Operating income (loss) as a % of annual operating income 4 % 68 % 32 % (4 )% 4 % 75 % 28 % (7 )% Balance Sheet Data Total receivables, net
$ 188,294 $ 281,064 $ 180,898 $ 125,287
462,810 402,266 349,325 400,308 Accounts payable 338,026 239,976 142,777 214,596
319,462 267,990 163,543 199,787 Total debt 278,542 300,426 260,432 246,418 299,011 309,813 214,328 230,882
Note: Due to rounding, the sum of quarterly percentage amounts may not equal 100%.
(1) Total receivables, net balances for the first, second and third quarters of
2012 reflect a reclassification of deferred service charge income between
Receivables, net and Accrued expenses and other current liabilities to conform to 2013 presentation. 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. 32 -------------------------------------------------------------------------------- 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 Increased purchases of chemicals and Hot and dry supplies for existing swimming pools Increased purchases of above-ground pools and irrigation products Fewer pool and landscape Unseasonably cool weather or installations Decreased purchases of chemicals and extraordinary amounts of rain supplies Decreased purchases of impulse items such as above-ground pools and accessories
Unseasonably early warming trends in A longer pool and landscape season, spring/late cooling trends in fall
thus positively impacting our
(primarily in the northern half of the U.S. and
Canada) Unseasonably late warming trends in A shorter pool and landscape season, spring/early cooling trends in fall thus negatively impacting our sales (primarily in the northern half of the U.S. and Canada) More normalized weather in the first quarter of 2013 sharply contrasted with the mild winter experienced in the same period of 2012. In the first quarter of 2012, above average temperatures surfaced throughout the Eastern half of North America, with record warm temperatures in the Northeast and the Midwest. More normal temperatures in 2013 resulted in delayed pool openings in comparison to 2012, which directly affected first quarter sales in most seasonal markets as evidenced by the sales growth variations between our year-round and seasonal markets. Our largest year-round swimming pool markets delivered growth of approximately 10% in the first quarter of 2013, whereas our more seasonal markets experienced close to 10% declines compared to the first quarter of 2012. Weather turned unfavorable in the second quarter of 2013 with unusually cool and wet conditions in our seasonal markets. We observed above normal precipitation across nearly the entire United Stateswith the exception of California, Texas, the Southwest and the Rockies. Below normal temperatures in the Central and Southeast United Statesand in Europediffered significantly from the above normal temperatures experienced in the second quarter of 2012. These conditions resulted in even further delayed pool openings in comparison to last year, which directly affected our second quarter sales in most seasonal markets. Weather trends in our seasonal markets largely normalized in the third and fourth quarters of 2013, resulting in sales growth rates in our seasonal markets to more closely align with sales growth rates in our largest, year-round markets. As discussed above, weather favorably impacted sales in 2012, particularly in the first quarter. Favorable weather trends continued in the beginning of the second quarter with much higher than normal temperatures across the United States, excluding the Pacific Northwest. The three month period between March and May 2012was the warmest on record both nationally and for 31 of the 37 states east of the Rocky Mountains. The unusually mild winter and record warm spring led sales to shift into the first and early second quarter and resulted in the earlier than normal peak of the 2012 season. June sales were negatively impacted by weather due to below normal temperatures across the Southeast and cooler temperatures compared to 2011 in most markets excluding Californiaand the Southwest. In the third and fourth quarters of 2012, weather conditions were favorable in most markets but comparable overall to the same period in 2011. Weather also had a moderately favorable impact on our operations in 2011. Sales benefited from weather conditions in the Southeast and Southwest, including record high temperatures in Texas, although this impact was partially offset by unfavorable conditions throughout the year on the West Coastdue to cooler than average temperatures. In the first quarter of 2011, our sales benefited from much more favorable weather conditions across the Sunbelt markets compared to the same period in 2010. Sales in our North Texasand Oklahomamarkets were also positively impacted by repair and replacement activity for freeze damaged pool equipment. While our sales in the second quarter of 2011 benefited from above average temperatures across the Southeast, a slow start to the pool season in the Midwest (due to record precipitation levels) and closer to average temperatures across the Northeast resulted in some unfavorable comparisons to the same period in 2010. In the third quarter of 2011, we estimate that the weather impact on sales was neutral overall compared to both the same period in 2010 and long-term averages. Weather conditions were more favorable in the fourth quarter of 2011, with warmer temperatures across much of the Eastern half of the country compared to the fourth quarter of 2010. 33 --------------------------------------------------------------------------------
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;
scheduled debt repayments;
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 obligations and other general corporate initiatives, including acquisitions, dividend payments and share repurchases. Our primary sources of working capital are cash from operations supplemented by bank borrowings, which have historically been sufficient to support our growth and finance acquisitions. The same principle applies to funds used for capital expenditures and share repurchases. We prioritize our use of cash based on investing in our business, maintaining a prudent debt structure and returning money to our shareholders. Our specific priorities for the use of cash are as follows:
maintenance and new sales center capital expenditures;
strategic acquisitions executed opportunistically; and
payment of cash dividends as and when declared by the Board.
As discussed further under the subheading Future Sources and Uses of Cash on page 35, we are required to comply with certain financial covenants under our debt agreements, including the maintenance of a maximum average total leverage ratio. Although more conservative than the maximum, we strive to maintain an average total leverage ratio of 1.50 to 2.00. While considering this metric, we also use our cash to repurchase common stock based on Board-defined parameters and to repay our debt. Capital expenditures have historically averaged 0.5% to 1.0% of net sales. Capital expenditures were 0.9% of net sales in 2013, 0.8% of net sales in 2012 and 1.1% of net sales in 2011. In 2011, following two to three years of limited capacity expansion, capital expenditures were higher than the historical average because we began purchasing, rather than leasing, new vehicles and forklifts. Going forward, we project capital expenditures to be near the high end of our historical range due to our continued investment in new vehicles, equipment and technology. Sources and Uses of Cash
The following table summarizes our cash flows (in thousands):
Year Ended December 31, 2013 2012 2011 Operating activities
$ 105,088 $ 119,078 $ 75,103Investing activities (19,861 ) (21,208 ) (25,578 ) Financing activities (89,485 ) (102,644 ) (40,554 ) Cash provided by operations of $105.1 millionin 2013 exceeded net income by $7.8 million. Compared to 2012, cash provided by operations decreased primarily due to normal seasonal timing differences in working capital. Cash provided by operations in 2012 exceeded net income by $37.1 millionand increased over 2011 primarily due to the increase in net income from 2011 and improved working capital management. Cash used in investing activities in 2013 declined compared to 2012 primarily due to lower acquisition payments. The decrease in cash used in investing activities in 2012 compared to 2011 is primarily due to higher capital expenditures of $3.2 millionin 2011, which included a few large information technology upgrades. 34 -------------------------------------------------------------------------------- Cash used in financing activities declined in 2013 due primarily to changes in our net borrowings, offset by repurchases of our shares in the open market. We had $15.5 millionof net proceeds from our debt arrangements in 2013 compared to net payments of $16.4 millionin 2012. In 2013, we repurchased $94.3 millionof shares on the open market, up $17.3 millioncompared to 2012. Cash used in financing activities increased in 2012 compared to 2011 due primarily to the change in net proceeds and payments on our debt arrangements. We made $16.4 millionof net payments on our debt arrangements in 2012 compared to $48.6 millionof net borrowings in 2011. The activity in 2012 for proceeds and payments on our debt arrangements included the payoff of our $100.0 millionFloating Rate Senior Notes at maturity on February 12, 2012. Also, on October 19, 2011, we entered into a new $430.0 millionunsecured syndicated senior revolving credit facility (the Credit Facility). Since the Credit Facility replaced and refinanced the outstanding balances under our $240.0 millionunsecured senior revolving credit facility (the Previous Revolver), proceeds from and payments on revolving lines of credit in 2011 reflected the $161.5 millionpayoff of the Previous Revolver. In 2012, we repurchased $77.0 millionof shares on the open market, up $6.0 millioncompared to 2011.
Future Sources and Uses of Cash
As amended on
September 20, 2013, our Credit Facility provides for $465.0 millionin borrowing capacity under a five-year revolving credit facility and includes sublimits for the issuance of swingline loans and standby letters of credit. Pursuant to an accordion feature, the aggregate maximum principal amount of the commitments under the Credit Facility may be increased at our request and with agreement by the lenders by up to $75.0 million, to a total of $540.0 million. The Credit Facility matures on September 20, 2018. We intend to use the Credit Facility for general corporate purposes and to fund future growth initiatives. At December 31, 2013, there was $194.4 millionoutstanding and $267.4 millionavailable for borrowing under the Credit Facility. We currently have five interest rate swap contracts in place that reduce our exposure to fluctuations in interest rates on the Credit Facility. These swap contracts convert the Credit Facility's variable interest rate to fixed rates of 1.185% on notional amounts totaling $50.0 million, 1.100% on a notional amount of $50.0 million, 1.050% on a notional amount of $25.0 millionand 0.990% on a notional amount of $25.0 million. Interest expense related to the notional amounts under these swaps is based on the fixed rates plus the applicable margin on the Credit Facility. All five swap agreements will terminate on October 19, 2016. The weighted average effective interest rate for the Credit Facility as of December 31, 2013was 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
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
total leverage ratio equaled 1.40 (compared to 1.49 as of
December 31, 2012) and the TTM average total debt amount used in this calculation was $263.3 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
December 31, 2013, our fixed charge ratio equaled 4.29 (compared to 3.90 as of December 31, 2012) and TTM Rental Expense was $48.9 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, 35 --------------------------------------------------------------------------------
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.
October 11, 2013, we and certain of our subsidiaries entered into a new, two-year accounts receivable securitization facility (the Receivables Facility) with a peak seasonal funding capacity of up to $120.0 million between March 1 and August 31and up to $80.0 million between September 1 and February 28. An additional seasonal facility limit of up to $40.0 millionmay be available between April 1 and June 30. We decided to employ this arrangement because it provides us with a lower cost form of financing. 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.
December 31, 2013, 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 2014. For additional information regarding our debt arrangements, see Note 5 of "Notes to Consolidated Financial Statements," included in Item 8 of this 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 February 21, 2014, $70.4 millionof 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. 36 --------------------------------------------------------------------------------
Payments Due by Period Less than More than Total 1 year 1-3 years 3-5 years 5 years Long-term debt
$ 246,418$ - $ 52,000 $ 194,418$ - Operating leases 150,058 42,282 63,343 30,901 13,532 $ 396,476 $ 42,282 $ 115,343 $ 225,319 $ 13,532For additional discussion related to our debt, see Note 5 of "Notes to Consolidated Financial Statements," included in Item 8 of this Form 10-K. The table below contains estimated interest payments (in thousands) related to our long-term debt obligations listed in the table above. Our estimates of future interest payments are calculated based on the December 31, 2013outstanding debt balances, using the fixed rates under our interest rate swap agreements for the applicable notional amounts and the weighted average effective interest rates as of December 31, 2013for the remaining outstanding balances not covered by our swaps. To project the estimated interest expense to coincide with the time periods used in the table above, we have projected the estimated debt balances for future years based on the scheduled maturity dates of the Credit Facility and the Receivables Facility. Estimated Payments Due by Period Less than More than Total 1 year 1-3 years 3-5 years 5 years Interest $ 16,339 $ 4,615 $ 8,276 $ 3,448$ - 37