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What changed in Pool Corporation's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Pool Corporation's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+374 added−385 removedSource: 10-K (2024-02-27) vs 10-K (2023-02-24)

Top changes in Pool Corporation's 2023 10-K

374 paragraphs added · 385 removed · 303 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

95 edited+13 added−11 removed37 unchanged
Biggest changeWeather Possible Effects Hot and dry • Increased purchases of chemicals and supplies for existing swimming pools • Increased purchases of above-ground pools and irrigation and lawn care products Unseasonably cool weather or extraordinary amounts • Fewer pool and irrigation and landscaping of rain installations • Decreased purchases of chemicals and supplies • Decreased purchases of impulse items such as above-ground pools and accessories Unseasonably early warming trends in spring/late cooling • A longer pool and landscape season, thus positively trends in fall impacting our sales (primarily in the northern half of the U.S. and Canada) Unseasonably late warming trends in spring/early cooling • A shorter pool and landscape season, thus negatively trends in fall impacting our sales (primarily in the northern half of the U.S. and Canada) For discussion regarding the effects seasonality and weather had on our results of operations in 2022 and 2021, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Fluctuations,” of this Form 10-K.
Biggest changeWeather Possible Effects Hot and dry • Increased purchases of chemicals and supplies for existing swimming pools • Increased purchases of above-ground pools and irrigation and lawn care products Unseasonably cool weather or extraordinary amounts • Fewer pool and irrigation and landscaping of rain installations • Decreased purchases of chemicals and supplies • Decreased purchases of impulse items such as above-ground pools and accessories Unseasonably early warming trends in spring/late cooling • A longer pool and landscape season, thus positively trends in fall impacting our sales (primarily in the northern half of the U.S. and Canada) Unseasonably late warming trends in spring/early cooling • A shorter pool and landscape season, thus negatively trends in fall impacting our sales (primarily in the northern half of the U.S. and Canada) For discussion regarding the effects seasonality and weather had on our results of operations in 2023 and 2022, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Fluctuations,” of this Form 10-K. 10 Government Regulations Our business is subject to a wide variety of regulations, principally under local fire codes and international, federal, state and local environmental and health and safety requirements, including regulation by the Environmental Protection Agency, the Consumer Product Safety Commission, the Department of Transportation, the Occupational Safety and Health Administration, the National Fire Protection Agency and the International Maritime Organization.
References to product line and product category data throughout this Form 10-K 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. Our goal is to be a trusted resource for both industry professionals and consumers in the outdoor living industry.
References to product line and product category data throughout this Form 10-K 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. Our goal is to be a trusted resource for both industry professionals, retailers and consumers in the outdoor living industry.
Customers may pick up products at any sales center location, or we may deliver products to their premises or job sites via our trucks or third-party carriers. For additional information on our sales centers, see Item 2, “Properties,” of this Form 10-K. 6 Our sales centers maintain well-stocked inventories to meet our customers’ immediate needs.
Customers may pick up products at any sales center location, or we may deliver products to their premises or job sites via our trucks or third-party carriers. For additional information on our sales centers, see Item 2, “Properties,” of this Form 10-K. Our sales centers maintain well-stocked inventories to meet our customers’ immediate needs.
Purchasing and Suppliers We enjoy good relationships with our suppliers, who generally offer competitive pricing, return policies and promotional allowances. It is customary in our industry for certain manufacturers to manage their shipments by offering seasonal terms to qualifying purchasers such as Pool Corporation, which are referred to as early buy purchases.
Purchasing and Suppliers We believe we enjoy good relationships with our suppliers, who generally offer competitive pricing, return policies and promotional allowances. It is customary in our industry for certain manufacturers to manage their shipments by offering seasonal terms to qualifying purchasers such as Pool Corporation, which are referred to as early buy purchases.
Environmental, Social and Governance (ESG) Environmental We are committed to sustainable business practices, which includes offering eco-friendly products to our customers, closely monitoring our sourcing activities, and being good stewards within the communities we serve. Currently, we are taking steps to reduce our carbon footprint and to improve product choices that allow pool and homeowners to reduce their environmental impact.
Environmental, Social and Governance (ESG) Environmental We are committed to sustainable business practices, which includes offering eco-friendly products to our customers, closely monitoring our sourcing activities, and being good stewards within the communities we serve. We are taking steps to reduce our carbon footprint and to improve product choices that allow pool and homeowners to reduce their environmental impact.
Similar to other discretionary purchases, replacement and refurbishment activities are more heavily impacted by economic factors such as consumer confidence, GDP and employment levels. Contractor labor availability has also become an issue in recent years, limiting our customers’ ability to fully meet consumer construction and renovation demand.
Similar to other discretionary purchases, replacement and renovation activities are more heavily impacted by economic factors such as consumer confidence, GDP and employment levels. Contractor labor availability has also become an issue in recent years, limiting our customers’ ability to fully meet consumer construction and renovation demand.
Our goal is to attract, develop and retain a talented team of diverse people inspired by our mission to provide exceptional value to our customers and suppliers and create exceptional 8 return to our shareholders, while providing exceptional opportunities for our employees. Our success depends on our employees understanding how their work contributes to the company’s overall strategy.
Our goal is to attract, develop and retain a talented team of diverse people inspired by our mission to provide exceptional value to our customers and suppliers and create exceptional return to our shareholders, while providing exceptional opportunities for our employees. Our success depends on our employees understanding how their work contributes to the company’s overall strategy.
We closely monitor employee turnover and conduct exit interviews to gain relevant information and adapt our engagement and retention strategy as appropriate. Governance Our employees, managers and officers conduct our business under the direction of our CEO and the oversight of our Board of Directors (our Board) to enhance our long-term value for our stockholders.
We closely monitor employee turnover and conduct exit interviews to gain relevant information and adapt our engagement and retention strategy as appropriate. 9 Governance Our employees, managers and officers conduct our business under the direction of our CEO and the oversight of our Board of Directors (our Board) to enhance our long-term value for our stockholders.
We believe that diversity drives innovation and delivers the best solutions to complex problems, and our culture is one where differences are welcomed, valued and respected. We are committed to expanding the diversity of our workforce through the hiring, retention and advancement of underrepresented populations.
We believe that diversity drives innovation and delivers the best solutions to complex problems. Our culture is one where differences are welcomed, valued and respected. 8 We are committed to expanding the diversity of our workforce through the hiring, retention and advancement of underrepresented populations.
No other product categories accounted for 10% or more of total net sales in any of the last three fiscal years. We continue to identify new related product categories, and we typically introduce new categories each year in select markets.
No other product categories accounted for 10% or more of total net sales in any of the last three fiscal years. 5 We continue to identify new related product categories, and we typically introduce new categories each year in select markets.
Competition We are the largest wholesale distributor of swimming pool and related backyard products (based on industry knowledge and available data) and one of the only national wholesale distributors focused on the swimming pool industry in the United States. We are also one of the leading distributors of irrigation and landscape products in the United States.
Competition We are the largest wholesale distributor of swimming pool and related backyard products (based on industry knowledge and available data) and one of the only national wholesale distributors focused on the swimming pool industry in the United States. We are also one of the leading distributors of irrigation and landscape maintenance products in the United States.
These favorable trends include the following: • long-term growth in housing units in warmer markets due to the population migration toward the southern United States, where use of the outdoor home environment is more prevalent and extends longer throughout the year; • increased homeowner spending on outdoor living spaces for relaxation and entertainment; • consumers bundling the purchase of a swimming pool and other products, with new irrigation systems, landscaping and improvements to outdoor living spaces often being key components to both pool installations and remodels; • consumers using more automation and control products, higher quality materials and other pool features that add to our sales opportunities over time; • consumers increasing focus on environmentally sustainable, energy-efficient products; and • stay-at-home and remote work trends as homeowners seek to create attractive areas in their backyards as an extension of their home space.
These favorable trends include the following: • long-term growth in housing units in warmer climate markets due to the population migration toward the southern United States, where use of the outdoor home environment is more prevalent and extends longer throughout the year; • increased homeowner spending on outdoor living spaces for relaxation and entertainment; • consumers bundling the purchase of a swimming pool and other products, with new irrigation systems, landscaping and improvements to outdoor living spaces often being key components to both pool installations and remodels; • consumers using more automation and control products, higher quality materials and other pool features that add to our sales opportunities over time; • consumers increasing focus on environmentally sustainable, energy-efficient products; and • remote and hybrid work trends as homeowners seek to create attractive areas in their backyards as an extension of their home space.
Our total compensation package includes cash compensation (base salary and incentive or bonus payments), company contributions toward additional benefits (such as health and disability plans), retirement plans with a company match and paid time off. We also offer the opportunity to become a shareholder through equity grants for management and our employee stock purchase plan.
Our total compensation package includes cash compensation (base salary and performance-based incentive or bonus payments), company contributions toward additional benefits (such as health and disability plans), retirement plans with a company match and paid time off. We also offer the opportunity to become a shareholder through equity grants for management and our employee stock purchase plan.
Item 1. Business General Pool Corporation (the Company , which may be referred to as we, us or our ), a member of the S&P 500 Index, is the world’s largest wholesale distributor of swimming pool supplies, equipment and related leisure products and is one of the leading distributors of irrigation and landscape products in the United States.
Item 1. Business General Pool Corporation (the Company , which may also be referred to as we, us or our ), a member of the S&P 500 Index, is the world’s largest wholesale distributor of swimming pool supplies, equipment and related leisure products and is one of the leading distributors of irrigation and landscape maintenance products in the United States.
Economic Environment Certain trends in the housing market, the availability of consumer credit and general economic conditions (as commonly measured by Gross Domestic Product or GDP) affect our industry, particularly new pool and irrigation system starts as well as the timing and extent of pool refurbishments, equipment replacements, landscaping projects and outdoor living space renovations.
Economic Environment Certain trends in the housing market, the availability of consumer credit and general economic conditions (as commonly measured by Gross Domestic Product or GDP) affect our industry, particularly new pool and irrigation system starts as well as the timing and extent of pool remodels, equipment replacements, landscaping projects and outdoor living space renovations.
As more consumers create and enhance outdoor living areas and continue to invest in their outdoor environment, we believe we can focus our resources to address such demand by leveraging our existing pool and irrigation and landscape customer base. We feel the development of our NPT network is a natural extension of our distribution model.
As more consumers create and enhance outdoor living areas and invest more in their outdoor environment, we believe we can focus our resources to address such demand by leveraging our existing pool and irrigation and landscape maintenance customer base. We feel the development of our NPT network is a natural extension of our distribution model.
We expect that consumers will continue to invest in outdoor living spaces as consumers consider backyards an extension of their home space.
We expect that consumers will continue to invest in outdoor living spaces as they consider backyards an extension of their home space.
Our industry is highly fragmented, and as such, we add considerable value to the industry by purchasing products from a large number of manufacturers and then distributing the products to our customer base on conditions that are more favorable than our customers could obtain on their own.
Our industry is highly fragmented, and as such, we believe we add considerable value to the industry by purchasing products from a large number of manufacturers and then efficiently distributing the products to our customer base on conditions that are more favorable than our customers could obtain on their own.
We also offer virtual tools for homeowners to select and design their pool and outdoor environments, working with their chosen contractors to install these products. Our NPT® Backyard mobile app and www.nptpool.com ® allow our customers to virtually design, customize and view a pool in their own backyard within seconds.
We also offer virtual tools for homeowners to select and design their pool and outdoor environments, collaborating with their chosen contractors to install these products. Our NPT® Backyard mobile app and www.nptpool.com ® allow our customers to virtually design, customize and view a pool in their own backyard within seconds.
As a customer service, we also provide certain customers assistance with all aspects of their business, including site selection, store layout and design, product merchandising, business management system implementation, comprehensive product offering selections and efficient ordering and inventory management processes.
As a customer service, we also provide certain customers assistance with all aspects of their business, including site selection, store layout and design, product merchandising, comprehensive product offering selections and efficient ordering and inventory management processes.
Significant growth opportunities also reside with pool remodel and pool equipment replacement activities due to the aging of the installed base of swimming pools, technological advancements and the development of environmentally sustainable, energy-efficient and more aesthetically attractive products.
We believe significant growth opportunities also reside with pool remodel and pool equipment replacement activities due to the aging of the installed base of swimming pools, technological advancements and the development of environmentally sustainable, energy-efficient and more aesthetically attractive products.
Our DEI efforts are focused on expanding content in core employee development programs and improving our ability to recruit and hire first-class diverse talent. To create connection and community, we've established a Women’s Interactive Network (WIN) and diversity mentoring program to cultivate the growth and development of our female and diverse employees.
Our DEI efforts are focused on expanding content in core employee development programs and improving our ability to recruit and hire first-class diverse talent. To create connection and community, we have established a Women’s Interactive Network (WIN) and diversity mentoring program to cultivate the growth and development of our female and diverse employees.
This characteristic has helped cushion the negative impact on revenues in periods when unfavorable economic conditions and softness in the housing market adversely impacted consumer discretionary spending, including pool construction and major replacement and refurbishment activities. 1 The following table reflects growth in the domestic installed base of in-ground swimming pools over the past 11 years (based on Company estimates and information from 2021 P.K.
This characteristic has helped cushion the negative impact on revenues in periods when unfavorable economic conditions and softness in the housing market adversely impacted consumer discretionary spending, including pool construction and major replacement and renovation activities. 1 The following table reflects growth in the domestic installed base of in-ground swimming pools over the past 11 years (based on Company estimates and information from 2022 P.K.
In addition to our 19 standalone NPT sales centers, we currently have over 100 SCP and Superior sales centers that feature consumer showrooms where landscape and swimming pool contractors, as well as homeowners, can view and select pool components including pool tile, decking materials and interior pool finishes in various styles and grades, and serve as stocking locations for our NPT branded products.
In addition to our 21 standalone NPT sales centers, we currently have over 100 SCP and Superior sales centers that feature consumer showrooms where landscape and swimming pool contractors, as well as homeowners, can view and select pool components including pool tile, decking materials and interior pool finishes in various styles and grades, and serve as stocking locations for our NPT brand products.
We use local sales and marketing personnel to promote the growth of our business and develop and strengthen our customers’ businesses. Our sales and marketing personnel focus on developing customer training programs and promotional activities, creating and enhancing sales management tools and providing product and market expertise. Our local sales personnel work from our sales centers.
We use local sales and marketing personnel to promote the growth of our business and develop and strengthen our customers’ businesses. Our sales and marketing personnel focus on developing customer training programs and promotional activities, creating and enhancing sales management tools and providing product and market expertise.
Data, Inc. reports): The swimming pool remodel, renovation and upgrade market currently accounts for 21% to 23% of consumer spending in the pool industry.
Data, Inc. reports): The swimming pool remodel, renovation and upgrade market currently accounts for an estimated 21% to 23% of consumer spending in the pool industry.
These customers also buy from other distributors, mass merchants, home stores and certain specialty and internet retailers. We provide extended payment terms to qualified customers for sales under pre-season early buy programs, which typically occur during the fourth and first quarters. The extended terms usually require payments in equal installments during the second quarter of each year. See Item 7.
These customers also buy products from other distributors, mass merchants, home stores and certain specialty and internet retailers. 4 We provide extended payment terms to qualified customers for sales under pre-season early buy programs, which typically occur during the fourth and first quarters. The extended terms usually require payments in equal installments during the second quarter of each year.
Many new homeowners with existing pools transform older pools into a modern backyard oasis through upgraded finishes and updated equipment.
Many new homeowners with existing pools transform older pools into a modern backyard oasis through upgraded features, finishes and equipment.
Consumers typically spend more on new pools, refurbishment and replacement when general economic conditions are strong. 2 We believe that over the long term, single-family housing turnover and home value appreciation may correlate with demand for new pool construction, with higher rates of home turnover and appreciation having a positive impact on new pool installations over time.
Consumers typically spend more on new pools, new irrigation systems, renovations and replacement when general economic conditions are strong. 2 We believe that over the long term, home value appreciation and single-family housing turnover correlate with demand for new pool construction, with higher rates of home appreciation and turnover having a positive impact on new pool installations over time.
Sun Wholesale Supply, Inc. also owns and operates a specialty chemical packaging operation providing pool chemical products to the Pinch A Penny franchised store network and a portion of the chemical products sold through our SCP and Superior sales centers. We evaluate our sales centers based on their performance relative to predetermined standards that include both financial and operational measures.
Sun Wholesale Supply also owns and operates a specialty chemical re-packaging plant providing pool chemical products to the Pinch A Penny franchised store network and a portion of the chemical products sold through our SCP and Superior sales centers. 6 We evaluate our sales centers based on their performance relative to predetermined standards that include both financial and operational measures.
Within the United States market, we believe that irrigation accounts for approximately 30% to 35% of total spending in the industry, with the remaining 65% to 70% of spending related to landscape maintenance products, power equipment, hardscapes and specialty outdoor products and accessories.
Within the United States market, we believe that residential and commercial irrigation products account for approximately 30% to 35% of total spending in the industry, with the remaining 65% to 70% of spending related to landscape maintenance products, power equipment, hardscapes and specialty outdoor products and accessories.
Further, we are installing more energy-efficient systems throughout our sales center network. We are continually striving to ensure success in our business while protecting resources for future generations. Our sustainability goals include the 7 reduction of greenhouse gases and other harmful air emissions, water conservation, energy conservation and carbon footprint minimization.
We are also installing more energy-efficient systems throughout our sales center network. We continually strive to ensure success in our business while protecting resources for future generations. Our sustainability goals include the reduction of greenhouse gases and other harmful air emissions, water conservation, energy conservation and carbon footprint minimization.
Employee Health, Safety and Wellness Our commitment to the health, safety and wellness of our employees ranks at the top of our core fundamental values. Our ultimate goal is to send every employee home each night in the same condition in which they came to work that morning.
Employee Health, Safety and Wellness Our commitment to the health, safety and wellness of our employees ranks at the top of our core operating priorities. Our ultimate goal is to send every employee home each night in the same condition in which they came to work that morning.
When our employees succeed, the company succeeds. To help our employees achieve success in their roles, we emphasize continuous training and career development opportunities. These include annual performance assessments, promotion and advancement opportunities, safety and security protocols, updates on new products and service offerings and deployment of technologies.
When our employees succeed, the company succeeds. To help our employees achieve success in their roles, we emphasize continuous training and career development opportunities. These opportunities include annual performance reviews, succession planning, promotion and advancement opportunities, ongoing training in safety and security protocols, updates on new products and service offerings and deployment of technologies.
We provide competitive pay and benefits, training and continuing education, and professional development and promotional opportunities to engage and reward our team. We have established a set of standard operating procedures to optimize our human capital management function, including hiring and human resource policies, training practices and operational instructions.
We provide competitive pay and benefits, training and continuing education, and professional development and promotional opportunities to engage and reward our team. We have established a set of standard operating procedures to optimize our human capital management function, including recruitment and employee relations policies, training practices and operational instructions.
Going forward, we expect to continue to realize sales growth through market share gains and continued expansion of our product offerings with a focus on our Pool Corporation-branded products and exclusive brand offerings. Customers and Products We serve roughly 125,000 customers. No single customer accounted for 10% or more of our sales in 2022.
Going forward, we expect to continue to realize sales growth through market share gains and continued expansion of our product offerings with a focus on our proprietary and exclusive brand products. Customers and Products We serve roughly 125,000 customers. No single customer accounted for 10% or more of our sales in 2023.
To achieve this, our approach to DEI is as follows: • Diversity: Recruit, develop and retain a diverse workforce and provide developmental opportunities for career advancement for all employees; • Equity: Review current policies, practices and procedures to remove possible impediments to equal employment opportunity for prospective candidates and employees; and • Inclusion: Communicate that we, as an Employer of Choice, are committed to DEI with action-oriented programs that produce results and employee engagement.
To achieve this, our approach to DEI is as follows: • Diversity: Recruit, develop and retain a diverse workforce and provide developmental opportunities for career advancement for all employees; • Equity: Ensure that our policies, practices and procedures are fair and enable equal employment opportunity for prospective candidates and employees; and • Inclusion: Communicate that we, as an Employer of Choice, are committed to DEI with action-oriented programs that produce results and employee engagement.
As of December 31, 2022, we operated 420 sales centers in North America, Europe and Australia through our five distribution networks: • SCP Distributors (SCP); • Superior Pool Products (Superior); • Horizon Distributors (Horizon); • National Pool Tile (NPT); and • Sun Wholesale Supply, Inc. (Sun Wholesale).
As of December 31, 2023, we operated 439 sales centers in North America, Europe and Australia through our five distribution networks: • SCP Distributors (SCP); • Superior Pool Products (Superior); • Horizon Distributors (Horizon); • National Pool Tile (NPT); and • Sun Wholesale Supply (Sun Wholesale).
“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Allowance for Doubtful Accounts” for additional information.
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Allowance for Doubtful Accounts” for additional information.
In 2022, we generated approximately 96% of our sales in North America (including Canada and Mexico), 4% in Europe and less than 1% in Australia. While we continue to expand both domestically and internationally, we 4 expect this geographic mix to be similar over the next few years.
In 2023, we generated approximately 95% of our sales in North America (including Canada and Mexico), 4% in Europe and 1% in Australia. While we continue to expand both domestically and internationally, we expect this geographic mix to be similar over the next few years.
We believe that consistent growth of the installed base of in-ground swimming pools and the recurring nature of the maintenance and repair market has historically helped maintain a relatively consistent rate of industry growth.
Consistent growth of the installed base of in-ground swimming pools and the recurring nature of the maintenance and repair market has helped maintain a relatively consistent rate of industry growth.
In 2022, we generated approximately 59% of our net sales and 67% 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.
In 2023, we generated approximately 60% of our net sales and 70% 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.
We conduct our operations through 420 sales centers in North America, Europe and Australia. Our primary markets, with the highest concentration of swimming pools, are California, Texas, Florida and Arizona, collectively representing approximately 53% of our 2022 net sales.
We conduct our operations through 439 sales centers in North America, Europe and Australia. Our primary markets, with the highest concentration of swimming pools, are California, Texas, Florida and Arizona, collectively representing approximately 54% of our 2023 net sales.
We currently have over 600 product lines and approximately 50 product categories. Based on our 2022 product classifications, sales for our pool and hot tub chemicals product category represented approximately 13% of total net sales for 2022, 9% of total net sales in 2021 and 10% of total net sales in 2020.
We currently have over 650 product lines and approximately 50 product categories. Based on our 2023 product classifications, sales for our pool and hot tub chemicals product category represented approximately 14% of total net sales for 2023, 13% of total net sales in 2022 and 9% of total net sales in 2021.
Recently, we have donated over $2 million through our partnerships with YMCAs across the country to provide free water safety lessons and lifeguard training in underserved communities. Our donations have funded more than 20,000 safety around water swimming lessons and lifeguard training scholarships from coast to coast.
We have donated over $3 million through our partnerships with YMCAs across the country to provide free water safety lessons and lifeguard training in underserved communities. Our donations have funded safety around water swimming lessons and lifeguard training scholarships from coast to coast.
About 60% of consumer spending in the pool industry is for maintenance and minor repair of existing swimming pools. Maintaining a proper sanitization balance and the related upkeep and repair of swimming pool equipment, such as pumps, heaters, filters and safety equipment, creates non-discretionary demand for pool chemicals, equipment and other related parts and supplies.
We estimate about 60% of consumer spending in the pool industry is for maintenance and minor repair of existing swimming pools. Maintaining a safe and consistent water chemistry and the related upkeep and repair of swimming pool equipment, such as pumps, heaters, filters and safety equipment, creates non-discretionary demand for pool chemicals, equipment and other related parts and supplies.
While most new swimming pools are installed in existing homes, there has also been a strong correlation of new pool construction activity to new home construction activities over time. We also believe that homeowners’ good economic standing and availability of consumer credit are critical factors enabling the purchase of new swimming pools and irrigation systems.
While most new swimming pools are installed in existing homes, there has also been a correlation of new pool construction activity to new home construction activities over time. We also believe that homeowners’ discretionary spending capacity, availability of consumer credit and favorable borrowing rates are critical factors enabling the purchase of new swimming pools and irrigation systems.
In December 2021, we acquired Sun Wholesale Supply, Inc., which distributes swimming pool supplies, equipment and related leisure products, primarily servicing independently owned and operated Pinch A Penny, Inc. franchise locations. Going forward, we expect to expand Pinch A Penny franchise operations through additional locations of Pinch A Penny franchised stores.
Sun Wholesale Supply, which we acquired in December 2021, distributes swimming pool supplies, equipment and related leisure products, primarily servicing independently owned and operated Pinch A Penny, Inc. franchise locations. Since December 2021, we have expanded Pinch A Penny franchise operations through additional locations of Pinch A Penny franchised stores and expect to continue these expansion initiatives.
Our largest suppliers include Pentair plc, Hayward Pool Products, Inc. and Zodiac Pool Systems, Inc., which accounted for approximately 18%, 11% and 9%, respectively, of the cost of products we sold in 2022.
Our largest suppliers include Pentair plc, Hayward Pool Products, Inc. and Zodiac Pool Systems, Inc., which accounted for approximately 19%, 10% and 10%, respectively, of the cost of products we sold in 2023.
We also operate four centralized shipping locations (CSLs) in the United States that redistribute products we purchase in bulk quantities to our sales centers or, in some cases, directly to customers. Our CSLs are regional locations that carry a wide range of traditional swimming pool, irrigation and landscape products and related construction products.
We also operate four centralized shipping locations (CSLs) in the United States that redistribute products we purchase in bulk quantities to our sales centers or, in some cases, directly to customers. Our CSLs are regional locations that carry a wide range of outdoor living products.
Despite the recent decline in residential construction activities, we believe that we are well positioned to benefit from the inherent long-term growth opportunities in our industry fueled by favorable population migration trends, strong housing demand dynamics and product developments and technological advancements as consumers focus on more environmentally sustainable and energy-efficient products.
We believe that we are well positioned to benefit from the inherent long-term growth opportunities in our industry fueled by favorable population migration trends, strong housing demand dynamics and product developments and technological advancements as consumers focus on more environmentally sustainable and energy-efficient products. Historically, annual price inflation averaged 1% to 2% in our industry.
In addition to our recent initiatives, we continue to support our existing employees with training and development, which includes content aimed at creating and sustaining a more inclusive environment. Employee Growth and Development We strive to be an Employer of Choice by investing in our employees.
We also support our employees with training and development opportunities, which includes content aimed at creating and sustaining an inclusive environment. Employee Growth and Development We strive to be an Employer of Choice by investing in our employees.
Operating Strategy We distribute swimming pool supplies, equipment and related leisure products domestically through our SCP and Superior networks and internationally through our SCP network. We adopted the strategy of operating two distinct distribution networks within the U.S. swimming pool market primarily to offer our customers a choice of distinctive product selections, locations and service personnel.
We adopted the strategy of operating two distinct distribution networks within the U.S. swimming pool market primarily to offer our customers a choice of distinctive product selections, locations and service personnel. We distribute irrigation, landscape maintenance and related products through our Horizon network.
Our NPT network primarily serves the swimming pool market but does provide some overlap with the irrigation and landscape industries as we offer our market-leading brand of pool tile, composite pool finish products and hardscapes.
Our NPT network primarily serves the swimming pool market with our market-leading brand of pool tile and composite pool finish products but also provides some overlap with the irrigation and landscape industry as we offer NPT hardscapes and other outdoor living products.
We distribute irrigation, landscape maintenance and related products through our Horizon network. Swimming pool tile, decking materials and interior pool surfacing products are distributed through our NPT network, as well as through SCP and Superior networks.
Swimming pool tile, decking materials and interior pool surfacing products are distributed through our NPT network, as well as through SCP and Superior networks.
Among other factors like southern migration and housing shortage trends, the timing of these types of expenditures is more sensitive to economic factors including home values, single-family home sales and consumer confidence that impact consumer spending compared to the maintenance and minor repair market. New swimming pool construction comprises 17% to 18% of consumer spending in the pool industry.
Among other factors such as the southern population migration and housing shortage trends, the timing of these types of expenditures is more sensitive to economic factors including home values, single-family home sales and consumer confidence that impact consumer spending compared to the maintenance and minor repair market.
The desire for consumers to enhance their outdoor living spaces with hardscapes, lighting and outdoor kitchens also promotes future growth opportunities in this area. Favorable demographic and socioeconomic trends have positively impacted our industry, and we believe these trends will continue to do so over the long term.
The desire for consumers to enhance their outdoor living spaces with hardscapes, lighting and other outdoor living-related products provides us with additional future growth opportunities in this area. Over the past several years, favorable demographic and socioeconomic trends have positively impacted our industry, and we believe these trends will continue over the long term.
None of our employees are currently covered under any collective bargaining agreements. Our goal is to be an Employer of Choice through focusing on the engagement, development, retention, and health and well‑being of our employees. We believe that our success is a direct result of the contributions and commitment of our employees.
Our goal is to be an Employer of Choice by focusing on the engagement, development, retention, and health and well‑being of our employees. We believe that our success is a direct result of the contributions and commitment of our employees.
Unless otherwise indicated, information contained in this report and other documents filed by us under the federal securities laws concerning our views and expectations regarding the industries in which we operate are based on estimates made by us using data from industry sources and making assumptions based on our industry knowledge and experience.
To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility. 11 Unless otherwise indicated, information contained in this report and other documents filed by us under the federal securities laws concerning our views and expectations regarding the industries in which we operate are based on estimates made by us using data from industry sources and making assumptions based on our industry knowledge and experience.
Given the seasonal nature of our business, our peak employment period is the summer season and, depending on expected sales levels, we add 100 to 200 employees to our work force to meet seasonal demand. Approximately 90% of our employees are located in the U.S. We believe that we have good relations with our employees.
Given the seasonal nature of our business, our peak employment period is the summer season and, depending on expected sales levels, we add 100 to 200 employees to our work force to meet seasonal demand. We believe that we have good relations with our employees. None of our employees are currently covered under any collective bargaining agreements.
We offer a growing selection of energy-efficient and environmentally preferred products, which supports sustainability and helps pool owners save energy, water, time and money. Our environmentally-friendly technology products include variable speed pumps, LED pool and hot tub lights and high-efficiency heat pumps.
We also promote the growth of our industry by offering a growing selection of energy-efficient and environmentally preferred products, which support sustainability and can help pool owners save energy, water, time and money. Our environmentally friendly technology products include variable speed pumps, LED pool and hot tub lights and high-efficiency heat pumps.
We believe that our selection of pool equipment, supplies, chemicals, replacement parts, irrigation and related products and other pool construction and recreational products is the most comprehensive in the industry.
We offer our customers more than 200,000 manufacturer and proprietary and exclusive brand products. We believe that our selection of pool equipment, supplies, chemicals, replacement parts, irrigation and related products and other pool construction and recreational products is the most comprehensive in the industry.
These early buy purchases typically allow us to place orders in the fall at a modest discount, take delivery of product during the off-season months and pay for these purchases in the spring or early summer.
These early buy purchases typically allow us to place orders in the fall at a modest discount, take delivery of product during the off-season months and pay for these purchases in the spring or early summer. Due to vendor backlogs resulting in product availability constraints, these early buy opportunities were generally not available in 2021 or 2020.
Excluding borrowings to finance acquisitions, dividend payments and share repurchases, our peak borrowing usually occurs during the late spring and summer, primarily because extended terms offered by certain of our suppliers are typically payable during the second quarter of each year, while our peak accounts receivable collections typically occur in June, July and August. 9 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.
Excluding borrowings to finance acquisitions, dividend payments and share repurchases, our peak borrowing usually occurs during the late spring and summer, primarily because extended terms offered by certain of our suppliers are typically payable during the second quarter of each year, while our peak accounts receivable collections typically occur in June, July and August.
Employee Compensation and Benefits We strive to provide market-competitive compensation, benefits and services to our employees. Our performance-based compensation philosophy rewards each employee’s individual contributions regardless of gender, race or ethnicity.
Our local employees and partners have also donated their time and energy to make these events a success. Employee Compensation and Benefits We strive to provide market-competitive compensation, benefits and services to our employees. Our performance-based compensation philosophy rewards each employee’s individual contributions regardless of gender, race or ethnicity.
In 2022, the sale of maintenance and minor repair products (non-discretionary) accounted for approximately 60% of our sales and gross profits, while approximately 40% of our sales and gross profits were derived from the remodel, renovation, upgrade, construction and installation (equipment, materials, plumbing, electrical, etc.) of swimming pools (partially discretionary). These components may vary from year to year.
In 2023, the sale of maintenance and minor repair products (non-discretionary) accounted for approximately 62% of our sales, while approximately 24% of our sales were derived from partially discretionary products used in the remodel, renovation, upgrade of pools and approximately 14% of our sales were derived from discretionary products used in the construction and installation (equipment, materials, plumbing, electrical, etc.) of swimming pools.
The increase in pool and hot tub chemicals as a percentage of our total net sales from 2021 to 2022 was driven by inflation, improved supply over last year, strong demand for non-discretionary maintenance products, and our December 2021 acquisition of Porpoise Pool & Patio, Inc., who operates a chemical packaging plant.
The increase in pool and hot tub chemicals as a percentage of our total net sales from 2021 to 2022 was driven primarily by our December 2021 acquisition of Porpoise Pool & Patio and its chemical re-packaging plant, combined with inflation and improved supply over the prior year.
We also own rights to numerous internet domain names. 10 Geographic Areas The table below presents net sales by geographic region, with international sales translated into U.S. dollars at prevailing exchange rates, for the past three fiscal years (in thousands): Year Ended December 31, 2022 2021 2020 United States $ 5,674,909 $ 4,749,459 $ 3,579,990 International 504,818 546,125 356,633 $ 6,179,727 $ 5,295,584 $ 3,936,623 The table below presents net property and equipment by geographic region, with international property and equipment balances translated into U.S. dollars at prevailing exchange rates, for the past three fiscal year ends (in thousands): December 31, 2022 2021 2020 United States $ 185,117 $ 171,408 $ 100,857 International 8,592 7,600 7,384 $ 193,709 $ 179,008 $ 108,241 Website Access and Available Information Our website is www.poolcorp.com .
Geographic Areas The table below presents net sales by geographic region, with international sales translated into U.S. dollars at prevailing exchange rates, for the past three fiscal years (in thousands): Year Ended December 31, 2023 2022 2021 United States $ 5,126,308 $ 5,674,909 $ 4,749,459 International 415,287 504,818 546,125 $ 5,541,595 $ 6,179,727 $ 5,295,584 The table below presents net property and equipment by geographic region, with international property and equipment balances translated into U.S. dollars at prevailing exchange rates, for the past three fiscal year ends (in thousands): December 31, 2023 2022 2021 United States $ 215,109 $ 185,117 $ 171,408 International 8,820 8,592 7,600 $ 223,929 $ 193,709 $ 179,008 Website Access and Additional Information Our website is www.poolcorp.com .
Due to vendor backlogs resulting in product availability constraints, these early buy opportunities were generally not available in 2021 or 2020, but were re-established in 2022. Our preferred vendor program encourages our distribution networks to stock and sell products from a smaller number of vendors offering the best overall terms and service to optimize profitability and shareholder return.
Although early buy opportunities were re-established in 2022, they were not widely utilized until 2023 due to higher stocking levels in 2022. Our preferred vendor program encourages our distribution networks to stock and sell products from a smaller number of vendors offering the best overall terms and service to optimize profitability and shareholder return.
Irrigation system installations often occur in tandem with new single-family home construction making them more susceptible to economic variables that drive new home sales. However, the landscape industry offers similar maintenance-related growth opportunities as the swimming pool industry.
The irrigation and landscape maintenance industry shares many characteristics with the pool industry, and we believe that it exhibits similar long-term growth rates. Irrigation system installations often occur in tandem with new single-family home construction making them more susceptible to economic variables that drive new home sales.
We continuously endeavor to improve the ways in which we handle, distribute, transport and dispose of all products, particularly the chemicals and fertilizers that we sell. Social - Human Capital Management We employed approximately 6,000 people at December 31, 2022.
We also endeavor to handle, distribute, transport and dispose of all products in a responsible manner, particularly the chemicals and fertilizers that we sell. Social - Human Capital Management We employed approximately 6,000 people at December 31, 2023 and approximately 90% of our employees were located in the U.S.
We consider the commercial market to be a key growth opportunity as we focus more attention on providing products to customers who operate and service large commercial installations such as hotels, condominiums, apartment complexes, universities and community recreational facilities. We continue to leverage our existing networks and relationships to grow this 5 market.
Over the last several years, we have increased our product offerings and service abilities related to commercial swimming pools. We consider the commercial market to be a key growth opportunity as we focus more attention on providing products to customers who operate and service large commercial installations such as hotels, condominiums, apartment complexes, universities and community recreational facilities.
New product technology provides opportunities not only for improved energy-efficiency but also new enticements for leisure activities. Major equipment manufacturers have developed and will continue to develop more retrofit kits that allow homeowners to interact with their pools or hot tubs through their smartphones. Robotic cleaners offer consumers a more efficient option for maintaining their swimming pools.
Major equipment manufacturers have developed and will continue to develop more retrofit kits that allow homeowners to interact with their pools or hot tubs through their smartphones. Also, robotic cleaners offer consumers a more efficient option for maintaining their swimming pools. We see each of these developments as significant growth opportunities.
Intellectual Property We maintain both domestic and foreign registered trademarks and patents, primarily for our Pool Corporation and affiliate branded products that are important to our current and future business operations.
Intellectual Property We maintain both domestic and foreign registered trademarks and patents, primarily for our proprietary and exclusive brand products that are important to our current and future business operations. We also own rights to numerous internet domain names.
They are a trusted resource for our customers and are charged with understanding and meeting our customers’ specific needs. Our sales center personnel help educate our customers on a variety of topics including innovative products and solutions that can elevate their businesses. We offer our customers more than 200,000 manufacturer and Pool Corporation-branded products.
Our local sales personnel work from our sales centers as trusted resources for our customers and are charged with understanding and meeting our customers’ specific needs. Our sales center personnel help educate our customers on a variety of topics including the newest, most innovative products and solutions that can elevate their businesses.
Product offerings such as chemicals and fertilizers, power equipment and related repair and maintenance services offer recurring revenue streams in an industry otherwise closely tied to the housing market. The irrigation and landscape distribution business serves both residential and commercial markets, with the majority of sales related to the residential market.
However, the landscape industry offers similar maintenance-related growth opportunities as the swimming pool industry. Product offerings such as chemicals and fertilizers, power equipment and related repair and maintenance services offer recurring revenue streams in an industry otherwise closely tied to the new housing market.
Velocity slotting uses technology to identify fast moving, high velocity items, which are then color-coded and placed in an easily accessible location to create efficiencies for both our employees and customers.
We are focused on efficiency at our sales centers and warehouses through order processing speed at the counter, intentional showroom layouts, sales center merchandising, bin replenishment and velocity slotting. Velocity slotting uses technology to identify fast moving, high velocity items, which are then color-coded and placed in an easily accessible location to create efficiencies for both our employees and customers.
Our local employees and partners donated their time and energy to make these events a success. We also provide an entry level program to prepare Manager Trainees (MITs) for sales and operations management opportunities. Our MITs are hosted at either our state-of-the-art EDGEucation Center or in a virtual classroom.
We also provide an entry level training program to prepare Manager Trainees (MITs) for sales and operations management opportunities and build our pipeline for field leadership. Our MITs are hosted at either our state-of-the-art EDGEucation Center or in a virtual classroom. They gain valuable experience during their training program through field-based interaction with customers and operating management.
We expect inflationary product cost increases to moderate in 2023, and project that our sales will benefit approximately 4% from inflationary product cost increases. Business Strategy and Growth Strategy Our mission is to provide exceptional value to our customers and suppliers, creating exceptional return to our shareholders, while providing exceptional opportunities to our employees.
Business Strategy and Growth Strategy Our mission is to provide exceptional value to our customers and suppliers, creating exceptional return to our shareholders, while providing exceptional opportunities to our employees.
We face intense competition from many regional and local distributors in our markets and from three national wholesale distributors of irrigation and landscape supplies. We also face competition, both directly and indirectly, from mass market retailers (both store-based and internet) and large pool supply retailers who primarily buy directly from manufacturers.
We face intense competition from many regional and local distributors in our markets and from three national wholesale distributors of irrigation and landscape supplies.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeIf we maintain insufficient inventory levels and prices rise for these products, we could be forced to purchase products at higher prices and forego profitability in order to meet customer demand. While always present, these challenges have been heightened over the past couple years, as the pandemic altered consumer spending trends and caused us to increase our investments in inventory.
Biggest changeWhile always present, these challenges have been heightened over the past couple of years, as the pandemic altered consumer spending trends and caused us to increase our investments in inventory. Our business, financial condition and results of operations could be negatively impacted if we are unable to accurately forecast demand for our products.
In addition, we may have to write down such inventory if we are unable to sell it for its recorded value. 15 If we underestimate demand and purchase insufficient quantities of products, inventory shortages could result in delayed revenue or loss of sales opportunities altogether as potential customers turn to competitors’ products that are readily available.
In addition, we may have to write down such inventory if we are unable to sell it for its recorded value. If we underestimate demand and purchase insufficient quantities of products, inventory shortages could result in delayed revenue or loss of sales opportunities altogether as potential customers turn to competitors’ products that are readily available.
Should store‑ and internet-based mass market retailers increase their focus on the pool or irrigation industries, or increase the breadth of their pool and 14 irrigation and related product offerings, they may become a more significant competitor for our direct customers and end-use consumers, which could have an adverse impact on our business.
Should store‑ and internet-based mass market retailers increase their focus on the pool or irrigation industries or increase the breadth of their pool and irrigation and related product offerings, they may become a more significant competitor for our direct customers and end-use consumers, which could have an adverse impact on our business.
While warmer weather conditions favorably impact our sales, global warming trends and other significant climate changes can create more variability in the short term or lead to other unfavorable weather conditions that could adversely impact our sales or operations. Drought conditions or water management initiatives may lead to government-imposed water use restrictions.
While warmer weather conditions generally impact our sales favorably, global warming trends and other significant climate changes can create more variability in the short term or lead to other unfavorable weather conditions that could adversely impact our sales or operations. Drought conditions or water management initiatives may lead to government-imposed water use restrictions.
Such a breach could result in damage to our reputation and subject us to potential litigation, liability, fines and penalties and require us to incur significant expense to 16 address and remediate or otherwise resolve these issues, resulting in a possible material adverse impact on our financial condition and results of operations.
Such a breach could result in damage to our reputation and subject us to potential litigation, liability, fines and penalties and require us to incur significant expense to address and remediate or otherwise resolve these issues, resulting in a possible material adverse impact on our financial condition and results of operations.
Fluctuations in other factors relating to international trade, such as tariffs, transportation costs and inflation are additional risks for our international operations. We do not have operations in Russia or Ukraine.
Fluctuations in other factors relating to international trade, such as tariffs, transportation costs and inflation are additional risks for our international operations. We do not have operations in Israel, Russia or Ukraine.
Governmental actions designed to address climate change or the failure to meet environmental social and governance (“ESG”) expectations or standards or achieve our ESG goals could adversely affect our business.
Governmental actions designed to address climate change or the failure to meet environmental social and governance (ESG) expectations or standards or achieve our ESG goals could adversely affect our business.
Even in generally favorable economic conditions, severe and/or prolonged downturns in the housing market could have a material adverse impact on our financial performance.
Even in generally favorable economic conditions, severe or prolonged downturns in the housing market could have a material adverse impact on our financial performance.
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,” “intend,” “believe,” “will likely result,” “outlook,” “project,” “may,” “can,” “plan,” “target,” “potential,” “should” and other words and expressions of similar meaning.
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,” “intend,” “believe,” “will,” “outlook,” “project,” “may,” “can,” “plan,” “target,” “potential,” “should” and other words and expressions of similar meaning.
Additionally, if our suppliers experience difficulties or disruptions in their operations, if there is any material interruption in our supply chain (such as the interruptions caused by the COVID-19 pandemic and exacerbated by the invasion of Ukraine) or if we lose a single significant supplier due to financial failure or a decision to sell exclusively to retailers or end-use consumers, we may experience increased supply costs or delays in establishing replacement supply sources that meet our quality and control standards, which may affect our profitability.
Additionally, if our suppliers experience difficulties or disruptions in their operations, if there is any material interruption in our supply chain (such as the interruptions caused by the COVID-19 pandemic and exacerbated by the war in Ukraine) or if we lose a single significant supplier due to financial failure or a decision to sell exclusively to retailers or end-use consumers, we may experience increased supply costs or delays in establishing replacement supply sources that meet our quality and control standards, which may affect our profitability.
Certain extreme weather events, such as hurricanes, tornadoes, earthquakes, tropical storms, floods, drought and wildfires, may adversely impact us in several ways, including interfering with our ability to deliver our products and services, interfering with our receipt of supplies from our vendors, reducing demand for our products and services, and damaging our facilities.
Certain extreme weather events and natural disasters, such as hurricanes, tornadoes, earthquakes, tropical storms, floods, drought and wildfires, may adversely impact us in several ways, including interfering with our ability to deliver our products and services, interfering with our receipt of supplies from our vendors, reducing demand for our products and services, and damaging our facilities.
Exposure to various types of cyber-attacks such as malware, computer viruses, worms, ransomware or other malicious acts, as well as human error, could also potentially disrupt our operations, result in a significant interruption in the delivery of our goods and services or result in the loss of sensitive data.
Exposure to various types of cyber-attacks such as malware, computer viruses, worms, ransomware, social engineering or other malicious acts, as well as human error, could also potentially disrupt our operations, result in a significant interruption in the delivery of our goods and services or result in the loss of sensitive data.
We indirectly compete against mass market retailers and large pool or irrigation supply retailers as they purchase the great majority of their needs directly from manufacturers. We compete to a lesser extent with internet retailers, as they purchase the majority of their needs from distributors.
We indirectly compete against mass market retailers and large pool or irrigation supply retailers as they purchase the great majority of their supplies directly from manufacturers. We compete to a lesser extent with internet retailers, as they purchase the majority of their supplies from distributors.
Our international operations, including Canada and Mexico, which accounted for 8% of our total net sales in 2022, expose us to certain additional risks, including: • difficulty in staffing international subsidiary operations; • different political, economic and regulatory conditions; • local laws and customs; • currency fluctuations (including the current strength of the U.S. dollar compared to foreign currencies), exchange controls and repatriation restrictions; • adverse tax consequences; and • adverse consequences for violating anti-corruption, anti-competition, economic sanctions, immigration and other laws governing international commerce.
Our international operations, including Canada and Mexico, which accounted for 7% of our total net sales in 2023, expose us to certain additional risks, including: • difficulty in staffing international subsidiary operations; • different political, economic and regulatory conditions; • local laws and customs; • currency fluctuations (including the current strength of the U.S. dollar compared to foreign currencies), exchange controls and repatriation restrictions; • adverse tax consequences; and • adverse consequences for violating anti-corruption, anti-competition, economic sanctions, immigration and other laws governing international commerce.
We do not expect these developments to have a material adverse impact on us, but we can provide no assurances to this effect. Past growth may not be indicative of future growth.
While we do not expect these developments to have a material adverse impact on us, we can provide no assurances to this effect. Past growth may not be indicative of future growth.
We maintain disclosure controls and procedures designed to provide reasonable assurances regarding the accuracy and completeness of our SEC reports and internal control over financial reporting designed to provide reasonable assurance regarding the reliability and compliance with U.S. generally accepted accounting principles (“GAAP”) of our financial statements. We cannot assure you these measures will be effective. Item 1B.
We maintain disclosure controls and procedures designed to provide reasonable assurances regarding the accuracy and completeness of our SEC reports and internal control over financial reporting designed to provide reasonable assurance regarding the reliability and compliance with U.S. generally accepted accounting principles (GAAP) of our financial statements. We cannot assure you these measures will be effective.
Given the density and demand for pool products, some geographic markets that we serve also tend to have a higher concentration of competitors than others, particularly California, Texas, Florida and Arizona. These states encompass our four largest markets and represented approximately 53% of our net sales in 2022.
Given the density and demand for pool products, some geographic markets that we serve also tend to have a higher concentration of competitors than others, particularly California, Texas, Florida and Arizona. These states encompass our four largest markets and represented approximately 54% of our net sales in 2023.
In economic downturns or recessions, the demand for swimming pool, irrigation, landscape and related outdoor living products may decline, often corresponding with declines in discretionary consumer spending, the growth rate of pool eligible households and swimming pool construction.
In economic downturns or recessions, the demand for swimming pool, irrigation, landscape and related outdoor living products typically declines, often corresponding with declines in discretionary consumer spending, the growth rate of pool eligible households and swimming pool construction.
Consumer discretionary spending significantly affects our sales and is impacted by factors outside of our control, including general economic conditions, the residential housing market, unemployment rates, wage levels, interest rate fluctuations, inflation, disposable income levels, consumer confidence and access to credit.
Consumer discretionary spending significantly affects our sales and is impacted by a variety of factors, including general economic conditions, the residential housing market, unemployment rates, wage levels, interest rate fluctuations, inflation, disposable income levels, consumer confidence and access to credit.
A lack of sophistication or reliability of our information systems could adversely impact our operations and customer service and could require major repairs or replacements, resulting in significant costs and foregone revenue. Like other companies our size, we devote significant resources to protect our systems and data from cyber-attacks.
A lack of sophistication or reliability of our information systems could adversely impact our operations and customer service and could require major repairs or replacements, resulting in significant costs and foregone revenue. 17 We devote significant resources to protect our systems and data from cyber-attacks.
The risk of breaches is likely to continue to increase due to several factors, including the increasing sophistication of cyber-attacks, the wider accessibility of cyber-attack tools and increased reliance on e-commerce, open source software, cloud computer services and work-from-home staffing.
The risk of breaches is likely to continue to increase due to several factors, including the increasing sophistication of cyber-attacks, the wider accessibility of cyber-attack tools, the expanded size, use and complexity of our systems, and our increased reliance on e-commerce, open source software, cloud computer services and work-from-home staffing.
If our product and service offerings do not meet applicable safety standards or our customers’ expectations regarding safety or quality, we could experience lost sales and increased costs and be exposed to legal, financial and reputational risks, as well as governmental enforcement actions.
Product and service quality issues could negatively impact customer confidence in our brands and our business. If our product and service offerings do not meet applicable safety standards or our customers’ expectations regarding safety or quality, we could experience lost sales and increased costs and be exposed to legal, financial and reputational risks, as well as governmental enforcement actions.
However, the contributory effects of the war in Ukraine and prolonged geopolitical conflict globally may continue to result in increased inflation, increased labor costs, escalating energy and commodity prices and increasing costs of materials and services (together with shortages or inconsistent availability of materials and services), which could negatively affect our business (particularly our European operations), results of operations and financial condition.
However, the contributory effects of the wars in Israel or Ukraine and prolonged geopolitical conflict globally may result in higher inflation, labor costs, energy and commodity prices and costs of materials and services (together with shortages or inconsistent availability of materials and services), which could negatively affect our business (particularly our European operations), results of operations and financial condition.
However, the growth in this portion of our business depends on the expansion of the installed pool base, which could also be adversely affected by decreases in construction activities, similar to the trends between late 2006 and early 2010. A weak economy may also cause consumers to defer discretionary replacement and refurbishment activity.
However, the growth in this portion of our business depends on the expansion of the installed pool base, which could also be adversely affected by decreases in construction activities, similar to the trends experienced this past year. A weak economy may also cause consumers to defer discretionary replacement and renovation activity.
Excess tax benefits or deficiencies recognized under ASU 2016-09 vary from quarter to quarter and past results may not be indicative of future results. Risks Relating to Our Indebtedness Increases in interest rates would increase the cost of servicing our debt and could reduce our profitability.
Excess tax benefits or deficiencies recognized under ASU 2016-09 vary from quarter to quarter and past results may not be indicative of future results. 20 Risks Relating to Our Indebtedness The cost of servicing our debt could reduce our profitability if interest rates remain at elevated levels.
Our largest suppliers are Pentair plc, Hayward Pool Products, Inc. and Zodiac Pool Systems, Inc., which accounted for approximately 18%, 11% and 9%, respectively, of the costs of products we sold in 2022.
Our largest suppliers are Pentair plc, Hayward Pool Products, Inc. and Zodiac Pool Systems, Inc., which accounted for approximately 19%, 10% and 10%, respectively, of the costs of products we sold in 2023.
In particular, advocates of change are continuing to explore ways to reduce greenhouse gas emissions. These changes over time could affect the availability and cost of certain consumer products, commodities and energy, which in turn may impact our ability to procure certain products or services required for the operation of our business at the quantities and levels we require.
These changes over time could affect the availability and cost of certain consumer products, commodities and energy, which in turn may impact our ability to procure certain products or services required for the operation of our business at the quantities and levels we require.
Concern over climate change has led to and may in the future lead to new or increased legal and regulatory requirements designed to reduce or mitigate the effects of climate change or increase disclosure related to climate change, which could increase our operating or capital expenses and compliance burdens.
Concern over climate change has led to, and may in the future lead to, new or increased legal and regulatory requirements designed to reduce or mitigate the effects of climate change, which could increase our operating or capital expenses and compliance burdens. In particular, advocates of change are continuing to explore ways to reduce greenhouse gas emissions.
In 2017, we adopted Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting . Our projections of financial statement impacts related to ASU 2016-09 are subject to several assumptions which can vary significantly, including our estimated share price and the period that our employees will exercise vested stock options.
Our projections of financial statement impacts related to ASU 2016-09 are subject to several assumptions which can vary significantly, including our estimated share price and the period that our employees will exercise vested stock options.
We are making, and expect to continue to make, investments in technology to maintain and update our computer systems and to expand our ability to engage in e-commerce with our customers. We may not implement these changes as quickly or successfully as our customers expect. In addition, implementing significant system changes increases the risk of computer system disruption.
We are making, and expect to continue to make, investments in technology to maintain and update our computer systems and to expand our ability to engage in e-commerce with our customers. We may experience delays in making these updates and may not implement these changes as quickly or successfully as our customers expect.
We store chemicals and fertilizers, including certain combustibles and oxidizing compounds, at our sales centers. A fire, explosion or flood affecting one of our facilities could give rise to fire, safety and casualty losses and related liability claims. We maintain what we believe is prudent insurance protection.
We store chemicals, fertilizers and other combustible materials that involve fire, safety and casualty risks. We store chemicals and fertilizers, including certain combustibles and oxidizing compounds, at our sales centers. A fire, explosion or flood affecting one of our facilities could give rise to fire, safety and casualty losses and related liability claims.
Similarly, holders of our common stock should be aware that repurchases of our common stock under any repurchase plan then in effect are completely discretionary and may be suspended or discontinued at any time for any reason regardless of our financial position. 19 Lapses in our disclosure controls and procedures or internal control over financial reporting could materially and adversely affect us.
Similarly, holders of our common stock should be aware that repurchases of our common stock under any repurchase plan then in effect are completely discretionary and may be suspended or discontinued at any time for any reason regardless of our financial position.
Also, unseasonably cool weather or extraordinary rainfall during the peak season can have an adverse impact on demand due to decreased swimming pool use, installation and maintenance, as well as decreased irrigation installations.
Unseasonably late warming trends in the spring or early cooling trends in the fall can shorten the length of the pool season. Also, unseasonably cool weather or excessive rainfall during the peak season can have an adverse impact on demand due to decreased swimming pool use, installation and maintenance, as well as decreased irrigation installations.
Actions we take to achieve 17 our strategy or targets could result in increased costs to our operations. Investors or other stakeholders could react negatively to our targets or other positions we take on ESG matters, which could negatively impact our relationships with such stakeholders. We store chemicals, fertilizers and other combustible materials that involve fire, safety and casualty risks.
Actions we take to achieve our strategy or targets could result in increased costs to our operations. Investors or other stakeholders could react negatively to our targets or other positions we take on ESG matters, which could negatively impact our relationships with such stakeholders.
The potential problems and interruptions associated with implementing technology initiatives or conversions (including those contemplated under our multi-year systems upgrade project), as well as providing training and support for those initiatives, could disrupt or reduce our operational efficiency.
In addition, implementing significant system changes increases the risk of computer system disruption. The potential problems and interruptions associated with implementing technology initiatives or conversions (including those contemplated under our multi-year digital transformation project), as well as providing training and support for those initiatives, could disrupt or reduce our operational efficiency.
The entry of significant new competitors into these markets could negatively impact our sales. More aggressive competition by store- and internet-based mass merchants and large pool or irrigation supply retailers could adversely affect our sales. Mass market retailers today carry a limited range of, and devote a limited amount of shelf space to, merchandise and products targeted to our industry.
The entry of significant new competitors into these markets could negatively impact our sales. 15 More aggressive competition by store- and internet-based mass merchants and large pool or irrigation supply retailers could adversely affect our sales.
We depend on a global network of suppliers to source our products, including our own branded products and products we have exclusive distribution rights to. Failure to achieve and maintain a high level of product and service quality and safety could damage our reputation, expose us to litigation and negatively impact our financial performance.
Failure to achieve and maintain a high level of product and service quality and safety could damage our reputation, expose us to litigation and negatively impact our financial performance. We rely on a global network of manufacturers and other suppliers to provide us with the products we distribute.
Historically, mass market retailers have generally expanded by adding new stores and product breadth, but their product offering of pool and irrigation related products has remained relatively constant.
Mass market retailers today carry a limited range of, and devote a limited amount of shelf space to, merchandise and products targeted to our industry. Historically, mass market retailers have generally expanded by adding new stores and product breadth, but their product offering of pool and irrigation related products has remained relatively constant.
The clear trend in environmental, health, transportation and safety regulations is to place more restrictions and limitations on activities that impact the environment, such as the use and handling of chemicals and the discharge of greenhouse gases.
These laws and regulations have changed substantially and rapidly over the last 25 years, and we anticipate that there will be continuing changes. The clear trend in environmental, health, transportation and safety regulations is to place more restrictions and limitations on activities that impact the environment, such as the use and handling of chemicals and the discharge of greenhouse gases.
As a distribution company, maintaining favorable relationships with our suppliers is critical to our success.
Our distribution business is highly dependent on our ability to maintain favorable and stable relationships with suppliers. As a distribution company, maintaining favorable relationships with our suppliers is critical to our success.
In addition, changes in the insurance industry have generally led to higher insurance costs and decreased availability of coverage. We conduct business internationally, which exposes us to additional risks.
Successful claims for which we are not fully insured may adversely affect our working capital and profitability. In addition, changes in the insurance industry have generally led to higher insurance costs and decreased availability of coverage. 19 We conduct business internationally, which exposes us to additional risks.
Changes in, expanded enforcement of, or adoption of new federal, state or local laws and regulations governing minimum wage or living wage requirements, the classification of exempt and non-exempt employees or other wage, labor or workplace regulations could increase our costs of doing business and adversely impact our results of operations.
Changes in, expanded enforcement of, or adoption of new federal, state, local or international laws and regulations, including those governing minimum wage or living wage requirements, the classification of exempt and non-exempt employees or other wage, labor or workplace regulations, could increase our costs of doing business and adversely impact our results of operations. 18 We sell algaecides and pest control products that are regulated as pesticides under the Federal Insecticide, Fungicide and Rodenticide Act and various state pesticide laws.
Further, our business may also be affected by additional factors that generally apply to all companies operating in the U.S. and globally, which we have not included below. Risks Relating to Macroeconomic Conditions The demand for our products may be adversely affected by unfavorable economic conditions and changes in consumer discretionary spending.
Moreover, new risks emerge from time to time. Further, our business may also be affected by additional factors that generally apply to all companies operating in the U.S. and globally, which we have not included below.
We are subject to regulation under federal, state, local and international employment, environmental, health, transportation and safety requirements, which govern such things as packaging, labeling, handling, transportation, storage and sale of chemicals and fertilizers. These laws and regulations, and related interpretations and enforcement activity, may change as a result of a variety of factors, including political, economic or social events.
We are subject to numerous federal, state, local and international laws and regulations, many of which are complex and subject to varying interpretations, including regulations related to employment, environmental, health, transportation and safety requirements, which govern such things as packaging, labeling, handling, transportation, storage and sale of chemicals and fertilizers.
The areas in which we operate, including California, Florida, Texas and other coastal areas, have experienced recent natural disasters or present increased risks of adverse weather or natural disasters. The physical effects of climate change may increase the frequency or severity of natural disasters and other extreme weather events in the future, which would increase our exposure to these risks.
The areas in which we operate, including California, Florida, Texas and other coastal areas, have experienced recent natural disasters or present increased risks of adverse weather or natural disasters.
Although we presently do not expect to incur any capital or other expenditures relating to regulatory matters in amounts that may be material to us, we may be required to make such expenditures in the future. These laws and regulations have changed substantially and rapidly over the last 25 years and we anticipate that there will be continuing changes.
Moreover, compliance with such laws and regulations in the future could prove to be costly. Although we presently do not expect to incur any capital or other expenditures relating to regulatory matters in amounts that may be material to us, we may be required to make such expenditures in the future.
Hiring and retaining such qualified individuals may be adversely impacted by global and domestic economic uncertainty, and increased competition for such qualified individuals. If we are unable to attract and retain key personnel, our operating results could be adversely affected.
Hiring and retaining such qualified individuals may be adversely impacted by several factors, including (i) uncertainties regarding general economic conditions or our industry, (ii) our failure to offer competitive compensation and (iii) increased competition for qualified individuals. If we are unable to attract and retain key personnel, our operating results could be adversely affected.
However, we cannot guarantee that our insurance coverage will be adequate to cover future claims that may arise or that we will be able to maintain adequate insurance in the future at rates we consider reasonable. Successful claims for which we are not fully insured may adversely affect our working capital and profitability.
We maintain what we believe is prudent insurance protection. However, we cannot guarantee that our insurance coverage will be adequate to cover future claims that may arise or that we will be able to maintain adequate insurance in the future at rates we consider reasonable.
However, failure to comply with these laws and regulations may result in investigations, the assessment of administrative, civil and criminal fines, damages, seizures, disgorgements, penalties or the imposition of injunctive relief. Moreover, compliance with such laws and regulations in the future could prove to be costly.
These laws primarily relate to labeling, annual registration and licensing. Management has processes in place to facilitate and support our compliance with these requirements. However, failure to comply with these laws and regulations may result in investigations, the assessment of administrative, civil and criminal fines, damages, seizures, disgorgements, penalties or the imposition of injunctive relief.
We rely on manufacturers and other suppliers to provide us with the products we distribute. To succeed, we must continue to maintain effective business relationships with qualified suppliers who can timely and efficiently supply us with high quality products.
To succeed, we must continue to maintain effective business relationships with qualified suppliers who can timely and efficiently supply us with high quality products. As we increase the number of our proprietary and exclusive brand products. we distribute, our exposure to potential liability claims may increase.
The risks discussed below are not the only risks we face. Other risks or uncertainties not presently known to us, or that we currently believe are immaterial, may materially affect our business if they occur. Moreover, new risks emerge from time to time.
Investors should carefully consider the risks described below in addition to the other information set forth in this Annual Report on Form 10-K. The risks discussed below are not the only risks we face. Other risks or uncertainties not presently known to us, or that we currently believe are immaterial, may materially affect our business if they occur.
These quarters represent the peak months of swimming pool use, pool and irrigation installation and remodeling and repair activities. Unfavorable weather during these quarters in our largest geographic regions can significantly affect our results. Unseasonably late warming trends in the spring or early cooling trends in the fall can shorten the length of the pool season.
In 2023, we generated approximately 60% of our net sales and 70% of our operating income in the second and third quarters of the year. These quarters represent the peak months of swimming pool use, pool and irrigation installation and remodeling and repair activities. Unfavorable weather during these quarters in our largest geographic regions can significantly affect our results.
No assurance can be given that the expected results in any forward-looking statement will be achieved, and actual results may differ materially due to one or more factors. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.
No assurance can be given that the expected results in any forward-looking statement will be achieved, and actual results may differ materially due to one or more factors, including the risks described below in this Item 1A, below in Item 7 of this Form 10-K and elsewhere in this Form 10-K.
Our business, financial condition and results of operations could be negatively impacted if either or both of these situations occur frequently or in large volumes. Risks Relating to Technology, Cybersecurity and Data Privacy We rely on information technology systems to support our business operations.
Risks Relating to Technology, Cybersecurity and Data Privacy We rely on information technology systems to support our business operations. A significant disruption, breach or cybersecurity attack of our technological infrastructure could adversely affect our financial condition and results of operations.
A significant disturbance, breach or cybersecurity attack of our technological infrastructure could adversely affect our financial condition and results of operations. Information technology supports several aspects of our business, including among others, product sourcing, pricing, customer service, transaction processing, inventory management, financial reporting, collections and cost management.
Information technology supports several aspects of our business, including among others, product sourcing, pricing, customer service, transaction processing, inventory management, financial reporting, collections and cost management. Our ability to operate effectively on a day-to-day basis, communicate with our customers and accurately report our results depends on a reliable technological infrastructure, which is inherently susceptible to internal and external threats.
Maintenance and repair products and certain replacement and refurbishment products are required to maintain existing swimming pools, and each currently accounts for approximately 60% and 21% to 23% of net sales related to our swimming pool business.
Currently over 86% of our net sales are derived from sales of maintenance, repair, replacement and renovation products necessary to maintain existing swimming pools.
Risk Factors Certain factors that may affect our business and could cause actual results to differ materially from those expressed in any forward-looking statement are described below. Investors should carefully consider the risks described below in addition to the other information set forth in this 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. Risk Factors Investing in our securities involves multiple risks and uncertainties. Certain factors that may affect our business and could cause actual results to differ materially from those expressed in any forward-looking statement are described below.
We may have exposure to higher duty and tariff costs on certain of our imported products. We recorded $13.0 million within Cost of sales in the fourth quarter of 2022 related to duties and tariffs for certain imported chemicals.
In December 2022, we recorded $13.0 million within Cost of sales related to duties and tariffs for certain imported chemicals that we determined, prior to submission of final liquidation amounts of our import duties and tariffs, that the initial code we used to classify the product may only apply to bulk purchases.
Customs and Border Protection in December 2022. Changes in laws, court rulings, or differences in interpretation on product classification could lead to increased duty and tariff rates on these or other imported products. 18 Excess tax benefits or deficiencies recognized from our accounting for share-based awards impact our reported earnings.
To protect against potential penalties and receive clarification on the issue, we voluntarily filed a disclosure with U.S. Customs and Border Protection in December 2022. Changes in laws, court rulings, or differences in interpretation on product classification could lead to changes in duty and tariff rates on these or other imported products.
Given the nature of our business, weather is one of the principal external factors affecting our business and the effect of seasonality has a significant impact on our results. In 2022, we generated approximately 59% of our net sales and 67% of our operating income in the second and third quarters of the year.
Risks Relating to Our Business and Industry We are susceptible to adverse weather conditions, which could intensify as a result of climate change. Given the nature of our business, weather is one of the principal external factors affecting our business and the effect of seasonality has a significant impact on our results.
Our ability to operate effectively on a day-to-day basis, communicate with our customers and accurately report our results depends on a reliable technological infrastructure, which is inherently susceptible to internal and external threats. We are vulnerable to interruption by fire, natural disaster, power loss, telecommunication failures, internet failures, security breaches and other catastrophic events.
We are vulnerable to interruption, including by fire, natural disaster, power loss, telecommunication failures, internet failures, security breaches and other catastrophic events.
The potential effect of the replacement of LIBOR on our cost of capital cannot yet be determined. General Risks Changes in tax laws and accounting standards related to tax matters have caused, and may in the future cause, fluctuations in our effective tax rate.
For additional information regarding our interest rate risk, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” of this Form 10-K. General Risks Changes in tax laws and accounting standards related to tax matters have caused, and may in the future cause, fluctuations in our effective tax rate.
The potential for natural or man-made disasters or extreme weather, geopolitical events and security issues, labor or trade disputes and similar events could create these types of uncertainties and negatively impact our business in ways that we cannot presently predict. 12 Changes in our customer base could also impact us.
Discretionary spending is often adversely affected during times of economic, social or political uncertainty, whether caused by health threats, man-made or natural disasters, or other similar events discussed below in this item 1A. These events could create uncertainties that negatively impact our business in ways that we cannot presently predict. Changes in our customer base could also impact us.
For additional discussion regarding seasonality and weather, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Fluctuations,” of this Form 10-K. 13 Our distribution business is highly dependent on our ability to maintain favorable relationships with suppliers.
The physical effects of climate change may increase the frequency or severity of natural disasters and other extreme weather events in the future, which would increase our exposure to these risks. 14 For additional discussion regarding seasonality and weather, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Fluctuations,” of this Form 10-K.
If we do not manage these potential difficulties successfully, our operating results could be adversely affected. Our results in 2020 through the first half of 2022 were positively impacted by home-centric trends resulting from the COVID-19 pandemic. Recent trends, including a lower number of permits issued for new pools, suggest that new construction activities are moderating.
If we do not successfully manage these potential difficulties or successfully execute our business strategies and initiatives, our operating results could be adversely affected. The COVID-19 pandemic positively impacted home-centric trends in all of our markets, which led to a non-recurring surge of investment in pools and other backyard products.
Between late 2006 and early 2010, the unfavorable economic conditions and downturn in the housing market resulted in significant tightening of credit markets, which limited the ability of consumers to access financing for new swimming pools and irrigation systems.
Unfavorable economic conditions or a downturn in the housing market could result in a significant tightening of credit markets, which can limit the ability of consumers to access financing for new swimming pools and irrigation systems. 13 During 2022 and 2023, interest and inflation rates were higher than the three years prior to 2022, economic uncertainties increased, and consumer credit tightened, which led to a slowdown in new pool permits (signaling a decline in new construction projects).
Although the severity and duration of any such downturn is difficult to predict, we expect the heightened demand for our products during the pandemic to moderate as consumers apply less disposable income to pools and other home improvements.
During 2023, the heightened demand for our products during the pandemic moderated as consumers applied less disposable income to pools and other home improvements. These economic events reduced our revenues in 2023 and are expected to similarly impact our revenues in 2024.
Known and newly discovered software and hardware vulnerabilities are constantly evolving, which increases the difficulty of detecting and successfully defending against them. Consequently, we may not be able to implement security barriers or other preventative measures that repel all future cyber-attacks or detect such attacks in a timely manner to minimize the potential business disruption and unfavorable financial impacts.
Known and newly discovered software and hardware vulnerabilities are constantly evolving, which increases the difficulty of detecting and successfully defending against them.
Removed
Any similar tightening of consumer credit or increase in interest rates could prevent consumers from obtaining financing for pool, irrigation and related outdoor projects, which could negatively impact our sales of construction-related products. Discretionary spending is often adversely affected during times of economic, social or political uncertainty.
Added
Risks Relating to Macroeconomic Conditions or Events The demand for our products may be adversely affected by unfavorable economic conditions and changes in consumer discretionary spending. Demand for our products is subject to fluctuations and is difficult to predict, often due to factors outside of our control.
Removed
During 2022, interest rates and inflation rose, economic activity slowed and consumer credit tightened, which led to a slowdown in new pool permits (signaling a decline in new construction projects). Many experts are predicting a further downturn in 2023 for the United States economy and much of the global economy.
Added
An outbreak of disease or similar public health threat, such as the recent COVID-19 pandemic, could adversely impact our business and results of operations. An outbreak of disease or similar public health threat, such as the recent COVID-19 pandemic and its negative impact on the worldwide economy, could have an adverse impact on our workforce, supply chain or operations.
Removed
The COVID-19 pandemic, other major public health crises in the future, and associated responses could adversely impact our business and results of operations. The COVID-19 pandemic and its aftermath significantly impacted economic activity and markets throughout the world.
Added
Although our revenues increased during the COVID-19 pandemic that began in early 2020, we cannot assure you that our revenues would increase in the event of a future public health emergency.
Removed
Even as efforts to contain the pandemic, including vaccinations, have fostered progress and eased restrictions, new variants of the virus have caused additional outbreaks and uncertainties.
Added
New variants of COVID-19 could continue to cause outbreaks and uncertainties, and any future epidemics, pandemics or similar public health crises could adversely impact our business and results of operations. Other catastrophic events or societal unrest could adversely impact our operations.
Removed
Our increased growth rates in the latter half of 2020 through the first half of 2022 were driven by home-centric trends influenced by the COVID-19 pandemic, during which many consumers spent more time at their homes due to travel restrictions and remote work arrangements.
Added
Terrorist attacks, wars, rioting, labor strife, civil disturbances, societal unrest or political instability could negatively impact us directly by interfering with our ability to operate or indirectly by depressing macroeconomic conditions. Our customers could also encounter hardships that negatively impact their ability to make timely payments to us or to continue doing business with us.
Removed
We believe the easing of the pandemic in 2022 led to more travel and other out-of-home activities. Impacts from the COVID-19 pandemic, coupled with heightened demand, adversely impacted our supply chain in the latter half of 2021 through the beginning of 2022, making it difficult to source and receive products needed to keep our customers adequately supplied.
Added
This surge abated in mid-2022, when spending on these products began to decrease. Although we expect our financial performance to match or exceed pre-pandemic levels, we do not expect our near-term sales to match the levels experienced at the height of the pandemic. 16 We are subject to inventory management risks.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest change(2) In addition to the stand-alone NPT sales centers, there are over 100 SCP and Superior locations that have consumer showrooms and serve as stocking locations that feature NPT brand tile and composite finish products. 21 The table below identifies the number of sales centers in each state, territory or country by distribution network as of December 31, 2022: Location SCP Superior Horizon NPT Total United States California 28 24 19 6 77 Florida 39 5 17 1 62 Texas 26 5 20 4 55 Arizona 7 8 9 2 26 Washington 3 — 8 — 11 Georgia 7 2 — 1 10 North Carolina 5 2 2 1 10 Tennessee 6 4 — — 10 Nevada 2 3 3 1 9 New York 9 — — — 9 New Jersey 5 2 — — 7 Pennsylvania 5 1 — 1 7 Virginia 3 1 3 — 7 Alabama 4 2 — — 6 Louisiana 5 — — 1 6 Illinois 4 1 — — 5 Indiana 2 3 — — 5 Oregon 1 — 4 — 5 South Carolina 4 1 — — 5 Missouri 3 1 — — 4 Ohio 2 2 — — 4 Oklahoma 2 1 — 1 4 Arkansas 3 — — — 3 Colorado — 2 1 — 3 Idaho 1 — 2 — 3 Connecticut 2 — — — 2 Kansas 2 — — — 2 Massachusetts 2 — — — 2 Michigan 2 — — — 2 Minnesota 1 1 — — 2 Mississippi 2 — — — 2 Wisconsin 1 1 — — 2 Hawaii 1 — — — 1 Iowa 1 — — — 1 Kentucky — 1 — — 1 Maryland 1 — — — 1 Nebraska 1 — — — 1 New Mexico 1 — — — 1 Puerto Rico 1 — — — 1 Utah 1 — — — 1 West Virginia 1 — — — 1 Total United States 196 73 88 19 376 International Canada 17 — — — 17 France 8 — — — 8 Australia 6 — — — 6 Mexico 4 — — — 4 Portugal 2 — — — 2 Spain 2 — — — 2 Belgium 1 — — — 1 Croatia 1 — — — 1 Germany 1 — — — 1 Italy 1 — — — 1 United Kingdom 1 — — — 1 Total International 44 — — — 44 Total 240 73 88 19 420 22
Biggest change(2) In addition to the stand-alone NPT sales centers, there are over 100 SCP and Superior locations that have consumer showrooms and serve as stocking locations that feature NPT brand tile and composite finish products. 23 The tables below identify the number of sales centers in each state, territory or country by distribution network as of December 31, 2023: Location SCP Superior Horizon NPT Total United States California 29 25 19 6 79 Florida 41 5 17 1 64 Texas 27 5 22 5 59 Arizona 8 8 11 3 30 Washington 3 — 8 — 11 Georgia 7 2 — 1 10 North Carolina 5 2 2 1 10 Tennessee 6 4 — — 10 Nevada 2 3 3 1 9 New York 9 — — — 9 Alabama 5 2 — — 7 New Jersey 5 2 — — 7 Pennsylvania 5 1 — 1 7 Virginia 3 1 3 — 7 Louisiana 5 — — 1 6 Illinois 4 1 — — 5 Indiana 2 3 — — 5 Oregon 1 — 4 — 5 South Carolina 4 1 — — 5 Colorado 1 2 1 — 4 Missouri 3 1 — — 4 Ohio 2 2 — — 4 Oklahoma 2 1 — 1 4 Arkansas 3 — — — 3 Idaho 1 — 2 — 3 Massachusetts 3 — — — 3 Connecticut 2 — — — 2 Kansas 2 — — — 2 Michigan 2 — — — 2 Minnesota 1 1 — — 2 Mississippi 2 — — — 2 Wisconsin 1 1 — — 2 Hawaii 1 — — — 1 Iowa 1 — — — 1 Kentucky — 1 — — 1 Maryland 1 — — — 1 Nebraska 1 — — — 1 New Mexico 1 — — — 1 North Dakota 1 — — — 1 Puerto Rico 1 — — — 1 Utah 1 — — — 1 West Virginia 1 — — — 1 Total United States 205 74 92 21 392 24 Location SCP Superior Horizon NPT Total International Canada 17 — — — 17 France 8 — — — 8 Australia 6 — — — 6 Mexico 5 — — — 5 Portugal 3 — — — 3 Italy 2 — — — 2 Spain 2 — — — 2 Belgium 1 — — — 1 Croatia 1 — — — 1 Germany 1 — — — 1 United Kingdom 1 — — — 1 Total International 47 — — — 47 Total 252 74 92 21 439 25
As part of the acquisition, we also acquired non-sales center properties including a chemical packaging plant and three Pinch A Penny, Inc. retail stores in Florida.
As part of the acquisition, we also acquired non-sales center properties including a chemical re-packaging plant and three Pinch A Penny, Inc. retail stores in Florida.
We own fourteen sales center facilities, which includes six sales center facilities in Florida, three in Texas, and one in each of Alabama, California, Georgia, Mississippi and Tennessee.
We own fifteen sales center facilities, which includes six sales center facilities in Florida, three in Texas, two in Alabama, and one in each of California, Georgia, Mississippi and Tennessee.
As part of our acquisition of Porpoise Pool & Patio, Inc. in December 2021, we own the corporate headquarters and the Sun Wholesale Supply, Inc. facilities located in Florida, which consist of approximately 200,000 square feet. We also acquired a chemical packaging plant in Florida, which is approximately 105,000 square feet.
As part of our acquisition of Porpoise Pool & Patio, Inc. in December 2021, we own the corporate headquarters, which consist of approximately 46,000 square feet, and the Sun Wholesale Supply facilities located in Florida, which consist of approximately 209,000 square feet.
The table below summarizes the changes in our sales centers during the year ended December 31, 2022: Network 12/31/21 New Locations Closed Location Acquired Location 12/31/22 SCP (1) 193 2 — 1 196 Superior 73 — — — 73 Horizon 84 5 (1) — 88 NPT (2) 17 2 — — 19 Total Domestic 367 9 (1) 1 376 SCP International 43 1 — — 44 Total 410 10 (1) 1 420 (1) Total includes one distribution location for Sun Wholesale Supply, Inc., which we acquired in December 2021.
The table below summarizes the changes in our sales centers during the year ended December 31, 2023: Network 12/31/22 New Locations Closed Location Acquired Location 12/31/23 SCP (1) 196 7 — 2 205 Superior 73 1 — — 74 Horizon 88 2 — 2 92 NPT (2) 19 2 — — 21 Total Domestic 376 12 — 4 392 SCP International 44 2 — 1 47 Total 420 14 — 5 439 (1) Total includes one distribution location for Sun Wholesale Supply, which we acquired in December 2021.
As part of our normal business, we regularly evaluate sales center performance and site suitability and may relocate a sales center or consolidate multiple locations if a sales center is redundant in a market, underperforming or otherwise deemed unsuitable. We do not believe that any single lease is material to our operations.
We believe that our facilities are well maintained, suitable for our business and occupy sufficient space to meet our operating needs. As part of our normal business, we regularly evaluate sales center performance and site suitability and may relocate a sales center or consolidate multiple locations if a sales center is redundant in a market, underperforming or otherwise deemed unsuitable.
We lease all of our other properties and the majority of our leases have three to seven year terms. As of December 31, 2022, we had twenty-eight leases with remaining terms longer than seven years that expire between 2030 and 2036. Most of our leases contain renewal options, some of which involve rent increases.
As of December 31, 2023, we had twenty-two leases with remaining terms longer than seven years that expire between 2031 and 2036. Most of our leases contain renewal options, some of which involve rent increases. In addition to minimum rental payments, which are set at competitive rates, certain leases require reimbursement for taxes, maintenance and insurance.
Our centralized shipping locations (CSLs) range in size from approximately 115,000 square feet to 185,000 square feet. We believe that our facilities are well maintained, suitable for our business and occupy sufficient space to meet our operating needs.
We do not believe that any single lease is material to our operations. Our sales centers range in size from approximately 2,000 square feet to 95,000 square feet and generally consist of warehouse, counter, display and office space. Our centralized shipping locations (CSLs) range in size from approximately 115,000 square feet to 185,000 square feet.
Removed
In addition to minimum rental payments, which are set at competitive rates, certain leases require reimbursement for taxes, maintenance and insurance. Our sales centers range in size from approximately 2,000 square feet to 95,000 square feet and generally consist of warehouse, counter, display and office space.
Added
As part of this acquisition, we also acquired a chemical re-packaging plant in Florida, which is approximately 105,000 square feet. We lease all of our other properties, and the majority of our leases have three to seven year terms.
Added
We do not believe that any single lease is material to our operations.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeWhile the outcome of any litigation is inherently unpredictable, based on currently available facts, we do not believe that the ultimate resolution of any of these matters will have a material adverse impact on our financial condition, results of operations or cash flows. Item 4. Mine Safety Disclosures Not applicable. 23 PART II.
Biggest changeWhile the outcome of any litigation is inherently unpredictable, based on currently available facts, we do not believe that the ultimate resolution of any of these matters will have a material adverse impact on our financial condition, results of operations or cash flows. Item 4. Mine Safety Disclosures Not applicable. 26 PART II.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. Mine Safety Disclosures 23 PART II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 24 Item 6. [Reserved] 25 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 44 Item 8.
Biggest changeItem 4. Mine Safety Disclosures 26 PART II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 27 Item 6. [Reserved] 28 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 47 Item 8.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeAdditionally, we chose the S&P 500 Index for comparison, as opposed to an industry index, because we do not believe that we can reasonably identify a peer group or a published industry or line-of-business index that contains a sufficient number of companies in a similar line of business. 24 Base Period Indexed Returns Years Ending Company / Index 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 Pool Corporation $ 100.00 $ 115.97 $ 167.58 $ 296.54 $ 453.64 $ 244.81 S&P 500 Index 100.00 95.62 125.72 148.85 191.58 156.88 Nasdaq Index 100.00 97.16 132.81 192.47 235.15 158.65 Purchases of Equity Securities The table below summarizes the repurchases of our common stock in the fourth quarter of 2022: Period Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plan (2) Maximum Approximate Dollar Value of Shares That May Yet be Purchased Under the Plan (3) October 1 – October 31, 2022 60 $ 318.77 — $ 230,242,715 November 1 – November 30, 2022 — $ — — $ 230,242,715 December 1 – December 31, 2022 — $ — — $ 230,242,715 Total 60 $ 318.77 — (1) These shares may include shares of our common stock surrendered to us by employees in order to satisfy minimum tax withholding obligations in connection with certain exercises of employee stock options or lapses upon vesting of restrictions on previously restricted share awards, and/or to cover the exercise price of such options granted under our share-based compensation plans.
Biggest changeAdditionally, we chose the S&P 500 Index for comparison, as opposed to an industry index, because we do not believe that we can reasonably identify a peer group or a published industry or line-of-business index that contains a sufficient number of companies in a similar line of business. 27 Base Period Indexed Returns Years Ending Company / Index 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 12/31/23 Pool Corporation $ 100.00 $ 144.50 $ 255.71 $ 391.17 $ 211.10 $ 281.84 S&P 500 Index 100.00 131.49 155.68 200.37 164.08 207.21 Nasdaq Index 100.00 136.69 198.10 242.03 163.28 236.17 Issuer Purchases of Equity Securities The table below summarizes the repurchases of our common stock in the fourth quarter of 2023: Period Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plan (2) Maximum Approximate Dollar Value of Shares That May Yet be Purchased Under the Plan (2) October 1 – October 31, 2023 25,549 $ 314.68 25,420 $ 455,321,054 November 1 – November 30, 2023 91,355 $ 326.90 91,355 $ 425,457,224 December 1 – December 31, 2023 216,354 $ 375.99 216,354 $ 344,111,238 Total 333,258 $ 357.83 333,129 (1) These shares may include shares of our common stock surrendered to us by employees in order to satisfy minimum tax withholding obligations in connection with certain exercises of employee stock options or lapses upon vesting of restrictions on previously restricted share awards, and/or to cover the exercise price of such options granted under our share-based compensation plans.
The following graph compares the cumulative total shareholder return on our common stock for the last five fiscal years with the total return on the S&P 500 Index (of which we have been a member since 2020) and the Nasdaq Index for the same period, in each case assuming the investment of $100 on December 31, 2017 and the reinvestment of all dividends.
The following graph compares the cumulative total shareholder return on our common stock for the last five fiscal years with the total return on the S&P 500 Index (of which we have been a member since 2020) and the Nasdaq Index for the same period, in each case assuming the investment of $100 on December 31, 2018 and the reinvestment of all dividends.
We initiated quarterly dividend payments to our shareholders in the second quarter of 2004 and we have continued payments in each subsequent quarter. Our Board has increased the dividend amount seventeen times, including in the fourth quarter of 2004, annually in the second quarters of 2005 through 2008 and in the second quarters of 2011 through 2022.
Common Stock Dividends We initiated quarterly dividend payments to our shareholders in the second quarter of 2004 and we have continued payments in each subsequent quarter. Our Board has increased the dividend amount eighteen times, including in the fourth quarter of 2004, annually in the second quarters of 2005 through 2008 and in the second quarters of 2011 through 2023.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is traded on the Nasdaq Global Select Market under the trading symbol “POOL.” On February 17, 2023, there were approximately 740 holders of record of our common stock.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common Stock Our common stock is traded on the Nasdaq Global Select Market under the trading symbol “POOL.” On February 20, 2024, there were approximately 782 holders of record of our common stock and a significantly larger number of beneficial holders of our common stock.
There were 60 shares surrendered for this purpose in the fourth quarter of 2022. (2) In May 2022, our Board authorized an additional $196.2 million under our share repurchase program for the repurchase of shares of our common stock in the open market at prevailing market prices. (3) As of February 17, 2023, our total authorization remaining was $230.2 million.
There were 129 shares surrendered for this purpose in the fourth quarter of 2023. (2) In May 2023, our Board authorized an additional $413.6 million under our share repurchase program for the repurchase of shares of our common stock in the open market at prevailing market prices bringing the total authorization available under the program to $600.0 million.
We cannot assure shareholders or potential investors that dividends will be declared or paid any time in the future if our Board determines that there is a better use of our funds.
We cannot assure shareholders or potential investors that dividends will be declared or paid any time in the future.
Added
As of February 20, 2024, $344.1 million of the authorized amount remained available for use under our current share repurchase program. Unregistered Sales of Equity Securities There were no unregistered sales of equity securities during the three months ended December 31, 2023.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeThe following summarizes our outlook for 2023: • We expect sales to be flat to down 3% compared to 2022, impacted by the following factors and assumptions: ◦ normal weather patterns for 2023; ◦ inflationary product cost increases, which generally pass through to customers.
Biggest changeThe following summarizes our outlook for 2024: • We expect sales to be flat to a low single digit increase compared to 2023, impacted by the following factors and assumptions: ◦ normal weather patterns for 2024; ◦ sustained demand for pool maintenance products; ◦ volumes of discretionary products used for swimming pool construction to be flat to down 10%; ◦ volumes of products used in the remodeling, renovation and upgrading of swimming pools to be flat to down 10%; ◦ inflationary product cost increases, which generally pass through to customers of approximately 2% to 3%; and ◦ a 1% benefit from expansion of the installed base of in-ground swimming pools. • We project gross margin for the full year of 2024 to be around 30.0%, with our highest margin in the second quarter of the year.
We may declare and pay quarterly dividends so long as (i) the amount per share of such dividends is not greater than the most recently publicly announced amount dividends per share and (ii) our Average Total Leverage Ratio is less than 3.25 to 1.00 both immediately before and after giving pro forma effect to such dividends.
We may declare and pay quarterly dividends so long as (i) the amount per share of such dividends is not greater than the most recently publicly announced dividends per share and (ii) our Average Total Leverage Ratio is less than 3.25 to 1.00 both immediately before and after giving pro forma effect to such dividends.
The forward-looking statements in this Current Trends and Outlook section are subject to significant risks and uncertainties, including the sensitivity of our business to weather conditions; changes in the economy, consumer discretionary spending, the housing market, interest or inflation rates; our ability to maintain favorable relationships with suppliers and manufacturers; the extent to which home-centric trends experienced during the height of the pandemic will moderate or reverse; competition from other leisure product alternatives or mass merchants; our ability to continue to execute our growth strategies; changes in the regulatory environment; new or additional taxes, duties or tariffs; excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in Item 1A of this Form 10-K.
The forward-looking statements in this Current Trends and Outlook section and elsewhere in this document are subject to significant risks and uncertainties, including the sensitivity of our business to weather conditions; changes in the economy, consumer discretionary spending, the housing market, interest or inflation rates; our ability to maintain favorable relationships with suppliers and manufacturers; the extent to which home-centric trends experienced during the height of the pandemic will moderate or reverse; competition from other leisure product alternatives or mass merchants; our ability to continue to execute our growth strategies; changes in the regulatory environment; new or additional taxes, duties or tariffs; excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in Item 1A of this Form 10-K.
Changes in our purchasing mix also impact our estimates, as certain program rates can vary depending on our volume of purchases from specific vendors. We continually revise these estimates throughout the year to reflect actual purchase levels and identifiable trends.
Changes in our purchasing mix also impact our estimates, as certain program rates can vary depending on our volume of purchases from specific vendors. 33 We continually revise these estimates throughout the year to reflect actual purchase levels and identifiable trends.
To facilitate a sensitivity analysis, we reduced our consolidated fair value estimate to reflect more conservative discounted cash flow assumptions, the sensitivity of 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.
To facilitate a sensitivity analysis, we reduced our consolidated fair value estimate to reflect more conservative discounted cash flow assumptions, the sensitivity of a 150 basis point increase in our estimated weighted average cost of capital or a 50 basis point decrease in the estimated perpetuity growth rate.
In October 2022, we performed our annual goodwill impairment test and recorded goodwill impairment of $0.6 million related to the closure of a Horizon reporting unit in that period. In October 2021 and 2020, we performed our annual goodwill impairment test and did not recognize any goodwill impairment at the reporting unit level.
In October 2022, we performed our annual goodwill impairment test and recorded goodwill impairment of $0.6 million related to the closure of a Horizon reporting unit in that period. In October 2021, we performed our annual goodwill impairment test and did not recognize any goodwill impairment at the reporting unit level.
We issue inventory purchase orders in the normal course of business, which represent authorizations to purchase that are cancellable by their terms. We do not consider purchase orders to be firm inventory commitments; therefore, they are excluded from the table above.
We issue inventory purchase orders in the normal course of business, which represent authorizations to purchase that are cancellable by their terms. We do not consider our cancellable purchase orders to be firm inventory commitments; therefore, they are excluded from the table above.
Our specific priorities for the use of cash are as follows: • capital expenditures primarily for maintenance and growth of our sales center network, technology-related investments and fleet vehicles; • inventory and other operating expenses; • strategic acquisitions executed opportunistically; • payment of cash dividends as and when declared by our Board; • repayment of debt to maintain an average total target leverage ratio (as defined below) between 1.5 and 2.0; and 40 • repurchases of our common stock under our Board authorized share repurchase program.
Our specific priorities for the use of cash are as follows: • capital expenditures primarily for maintenance and growth of our sales center network, technology-related investments and fleet vehicles; • inventory and other operating expenses; • strategic acquisitions executed opportunistically; • payment of cash dividends as and when declared by our Board; • repayment of debt to maintain an average total target leverage ratio (as defined below) between 1.5 and 2.0; and • discretionary repurchases of our common stock under our Board authorized share repurchase program.
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 turn at slower rates. 29 We classify products at the sales center level based on sales at each location over the expected sellable period, which is the previous 12 months for most products, except for special order non-stock items that lack a SKU in our system and products with less than 12 months of usage.
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 turn at slower rates. 32 We classify products at the sales center level based on sales at each location over the expected sellable period, which is the previous 12 months for most products, except for special order non-stock items that lack a SKU in our system and products with less than 12 months of usage.
We believe we will remain in compliance with all covenants and financial ratio requirements throughout 2023. 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. Future Obligations We have certain fixed contractual obligations and commitments that include future estimated payments for general operating purposes.
We believe we will remain in compliance with all covenants and financial ratio requirements throughout 2024. 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. Future Obligations We have certain fixed contractual obligations and commitments that include future estimated payments for general operating purposes.
The following table presents certain unaudited quarterly data for 2022 and 2021. 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.
The following table presents certain unaudited quarterly data for 2023 and 2022. 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.
Changes in our business needs, fluctuating interest rates and other factors may result in actual payments differing from our estimates. We cannot provide certainty regarding the timing and amounts of these payments. The following table summarizes our obligations as of December 31, 2022 that are expected to impact liquidity and cash flow in future periods.
Changes in our business needs, fluctuating interest rates and other factors may result in actual payments differing from our estimates. We cannot provide certainty regarding the timing and amounts of these payments. The following table summarizes our obligations as of December 31, 2023 that are expected to impact liquidity and cash flow in future periods.
Determining the amount of unrecognized deferred tax liability on these undistributed earnings and cash balances 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 operate in 40 states, 1 United States territory and 11 foreign countries.
Determining the amount of unrecognized deferred tax liability on these undistributed earnings and cash balances 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 operate in 41 states, 1 United States territory and 11 foreign countries.
For more information, see Note 5 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K. Compliance and Future Availability As of December 31, 2022, we were in compliance with all covenants and financial ratio requirements under our Credit Facility, our Term Facility and our Receivables Facility.
For more information, see Note 5 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K. Compliance and Future Availability As of December 31, 2023, we were in compliance with all covenants and financial ratio requirements under our Credit Facility, our Term Facility and our Receivables Facility.
We also provide an additional 5% reserve for excess lower sales velocity inventory and an additional 45% reserve for excess inventory with no sales for the past 12 months. 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 consider an additional 5% reserve for excess lower sales velocity inventory and an additional 45% reserve for excess inventory with no sales for the past 12 months. 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 calculated estimates of future interest payments based on the December 31, 2022 outstanding 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, 2022 for the remaining outstanding balances not covered by our swap contracts.
We calculated estimates of future interest payments based on the December 31, 2023 outstanding 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, 2023 for the remaining outstanding balances not covered by our swap contracts.
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.
We also exclude consolidated sales centers when we do not expect to maintain the majority of the existing business and existing sales centers that we consolidate 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.
Weather Impacts on Fiscal Year 2021 to Fiscal Year 2020 Comparisons For a detailed discussion of Weather Impacts on Fiscal Year 2021 compared to Fiscal Year 2020, see the Seasonality and Quarterly Fluctuations section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2021 Annual Report on Form 10-K.
Weather Impacts on Fiscal Year 2022 to Fiscal Year 2021 Comparisons For a detailed discussion of Weather Impacts on Fiscal Year 2022 compared to Fiscal Year 2021, see the Seasonality and Quarterly Fluctuations section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2022 Annual Report on Form 10-K.
As of December 31, 2022, we had two interest rate swap contracts in place and one forward-starting interest rate swap contract, each of which has the effect of converting our exposure to variable interest rates on a portion of our variable rate borrowings to fixed interest rates.
As of December 31, 2023, we had two interest rate swap contracts in place and one forward-starting interest rate swap contract, each of which has the effect of converting our exposure to variable interest rates on a portion of our variable rate borrowings to fixed interest rates.
These write-offs are charged against our allowance for doubtful accounts. In the past five years, write-offs have averaged approximately 0.08% of net sales annually. Write-offs as a percentage of net sales approximated 0.08% in 2022, 0.06% in 2021 and 0.09% in 2020. We expect that write-offs will range from 0.05% to 0.10% of net sales in 2023.
These write-offs are charged against our allowance for doubtful accounts. In the past five years, write-offs have averaged approximately 0.09% of net sales annually. Write-offs as a percentage of net sales approximated 0.12% in 2023, 0.08% in 2022 and 0.06% in 2021. We expect that write-offs will range from 0.05% to 0.10% of net sales in 2024.
We may recognize additional tax benefits related to stock option exercises in 2023 from grants that expire in years after 2023, for which we have not included any expected benefits in our guidance.
We may recognize additional tax benefits related to stock option exercises in 2024 from grants that expire in years after 2024, for which we have not included any expected benefits in our guidance.
As of December 31, 2022, U.S. income taxes were not provided on the earnings or cash balances of our foreign subsidiaries, outside of the provisions of the transition tax from U.S. tax reform.
As of December 31, 2023, U.S. income taxes were not provided on the earnings or cash balances of our foreign subsidiaries, outside of the provisions of the transition tax from U.S. tax reform.
The term loans require quarterly amortization payments beginning in September 2023 aggregating to 20% of the original principal amount of the loan during the third, fourth and fifth years of the loan, with all remaining principal due on the Credit Facility maturity date of September 25, 2026.
The term loan requires quarterly amortization payments during the third, fourth and fifth years of the loan, beginning in September 2023 aggregating to 20% of the original principal amount of the loan, with all remaining principal due on the Credit Facility maturity date of September 25, 2026.
Our discussion of consolidated operating results includes the operating results from acquisitions in 2022, 2021 and 2020. We have included the results of operations in our consolidated results since the respective acquisition dates.
Our discussion of consolidated operating results includes the operating results from acquisitions in 2023, 2022 and 2021. We have included the results of operations in our consolidated results since the respective acquisition dates.
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.
After 15 months, we include acquired, consolidated and new market sales centers in the base business calculation including the comparative prior year period.
The reserve is intended to reflect the value of inventory at net realizable value. We provide a reserve of 5% for inventory with lower sales velocity, inventory with no sales for the past 12 months and non-stock inventory as determined at the sales center level.
The reserve is intended to reflect the value of inventory at net realizable value. We evaluate a potential reserve for 5% for inventory with lower sales velocity, inventory with no sales for the past 12 months and non-stock inventory as determined at the sales center level.
We also plan to broaden our geographic presence by opening about 10 new sales centers in 2023 and by making selective acquisitions when appropriate opportunities arise. We base our assumptions on normal weather conditions and do not incorporate alternative weather predictions into our guidance.
We also plan to broaden our geographic presence by opening about 10 or more new sales centers in 2024 and by making selective acquisitions when appropriate opportunities arise. We base our assumptions on normal weather conditions and do not incorporate alternative weather predictions into our guidance.
In 2023, we expect our effective tax rate will be approximately 25.3% to 25.5%, without the impact of ASU 2016-09. Our effective tax rate is dependent upon our results of operations and may change if actual results are different from our current expectations.
In 2024, we expect our effective tax rate will be approximately 25.3% without the impact of ASU 2016-09. Our effective tax rate is dependent upon our results of operations and may change if actual results are different from our current expectations.
Financial Covenants Financial covenants of the Credit Facility and the Term 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 December 31, 2022, the calculations of these two covenants are detailed below: • Maximum Average Total Leverage Ratio .
Financial Covenants Financial covenants of the Credit Facility, Term Facility and Receivables 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 December 31, 2023, the calculations of these two covenants are detailed below: 44 • Maximum Average Total Leverage Ratio .
Recent Accounting Pronouncements See Note 1 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K for details. 33 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, 2022 2021 2020 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 68.7 69.5 71.3 Gross profit 31.3 30.5 28.7 Operating expenses 14.7 14.8 16.9 Operating income 16.6 15.7 11.8 Interest and other non-operating expenses, net 0.7 0.2 0.3 Income before income taxes and equity in earnings 15.9 % 15.6 % 11.5 % Note: Due to rounding, percentages may not add to operating income or income before income taxes and equity in earnings.
Recent Accounting Pronouncements See Note 1 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K for details. 36 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, 2023 2022 2021 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 70.0 68.7 69.5 Gross profit 30.0 31.3 30.5 Operating expenses 16.5 14.7 14.8 Operating income 13.5 16.6 15.7 Interest and other non-operating expenses, net 1.1 0.7 0.2 Income before income taxes and equity in earnings 12.4 % 15.9 % 15.6 % Note: Due to rounding, percentages may not add to operating income or income before income taxes and equity in earnings.
The estimated impact related to ASU 2016-09 is subject to several assumptions which can vary significantly, including our estimated share price and the period that our employees will exercise vested stock options. We recorded a $10.8 million benefit in our provision for income taxes for the year ended December 31, 2022 related to ASU 2016-09.
The estimated impact related to ASU 2016-09 is subject to several assumptions which can vary significantly, including our estimated share price and the period that our employees will exercise vested stock options. We recorded a $6.7 million benefit in our provision for income taxes for the year ended December 31, 2023 related to ASU 2016-09.
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. At December 31, 2022, there was $199.5 million outstanding under the Receivables Facility at a weighted average effective interest rate of 5.2%, excluding commitment fees.
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. At December 31, 2023, there was $191.7 million outstanding under the Receivables Facility at a weighted average effective interest rate of 6.2%, excluding commitment fees.
If the balance of the accounts receivable reserve increased or decreased by 20% at December 31, 2022, pretax income would change by approximately $1.9 million and earnings per share would change by approximately $0.04 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2022).
If the balance of the accounts receivable reserve increased or decreased by 20% at December 31, 2023, pretax income would change by approximately $2.3 million and earnings per share would change by approximately $0.04 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2023).
If the balance of our inventory reserve increased or decreased by 20% at December 31, 2022, pretax income would change by approximately $4.2 million and earnings per share would change by approximately $0.08 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2022).
If the balance of our inventory reserve increased or decreased by 20% at December 31, 2023, pretax income would change by approximately $4.7 million and earnings per share would change by approximately $0.09 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2023).
(Unaudited) Year Ended December 31, 2022 2021 Diluted EPS $ 18.70 $ 15.97 Less: ASU 2016-09 tax benefit 0.27 0.74 Adjusted diluted EPS $ 18.43 $ 15.23 Fiscal Year 2021 compared to Fiscal Year 2020 For a detailed discussion of the Results of Operations in Fiscal Year 2021 compared to Fiscal Year 2020, see the Results of Operations section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2021 Annual Report on Form 10-K. 38 Seasonality and Quarterly Fluctuations For discussion regarding the effects seasonality and weather have on our business, see Item 1, “Business,” of this Form 10-K.
(Unaudited) Year Ended December 31, 2023 2022 Diluted EPS $ 13.35 $ 18.70 Less: ASU 2016-09 tax benefit 0.17 0.27 Adjusted diluted EPS $ 13.18 $ 18.43 Fiscal Year 2022 compared to Fiscal Year 2021 For a detailed discussion of the Results of Operations in Fiscal Year 2022 compared to Fiscal Year 2021, see the Results of Operations section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2022 Annual Report on Form 10-K. 40 Seasonality and Quarterly Fluctuations For discussion regarding the effects seasonality and weather have on our business, see Item 1, “Business,” of this Form 10-K.
The weighted average effective interest rate for the Credit Facility as of December 31, 2022 was approximately 4.4%, excluding commitment fees. Term Facility Our Term Facility provides for $185.0 million in borrowing capacity and matures on December 30, 2026.
The weighted average effective interest rate for the Credit Facility as of December 31, 2023 was approximately 4.7%, excluding commitment fees and including the impact of our interest rate swaps. Term Facility Our Term Facility provides for $185.0 million in borrowing capacity and matures on December 30, 2026.
We recorded a $10.8 million, or $0.27 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, for the year ended December 31, 2022 compared to a tax benefit of $30.0 million, or $0.74 per diluted share, realized in 2021.
We recorded a $6.7 million, or $0.17 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, for the year ended December 31, 2023 compared to a tax benefit of $10.8 million, or $0.27 per diluted share, realized in 2022.
We estimate that we have approximately $1.1 million in unrealized excess tax benefits related to stock options that expire and restricted awards that vest in the first quarter of 2023.
We estimate that we have approximately $3.8 million in unrealized excess tax benefits related to stock options that expire and restricted awards that vest in the first quarter of 2024.
Income Taxes Our effective income tax rate was 24.0% at December 31, 2022 and 21.1% at December 31, 2021. We recorded a $10.8 million, or $0.27 per diluted share, benefit from ASU 2016-09 for the year ended December 31, 2022 compared to a benefit of $30.0 million, or $0.74 per diluted share, realized in 2021.
Income Taxes Our effective income tax rate was 24.0% at December 31, 2023 and December 31, 2022. We recorded a $6.7 million, or $0.17 per diluted share, benefit from ASU 2016-09 for the year ended December 31, 2023 compared to a benefit of $10.8 million, or $0.27 per diluted share, realized in 2022.
As of December 31, 2022, our average total leverage ratio equaled 1.37 (compared to 0.77 as of December 31, 2021) and the TTM average total indebtedness amount used in this calculation was $1.5 billion. 42 • Minimum Fixed Charge Coverage Ratio .
As of December 31, 2023, our average total leverage ratio equaled 1.39 (compared to 1.37 as of December 31, 2022) and the TTM average total indebtedness amount used in this calculation was $1.1 billion. • Minimum Fixed Charge Coverage Ratio .
We also evaluate whether the calculated reserve provides sufficient coverage of total inventory with no sales for the past 12 months. We have not changed our methodology from prior years.
We also evaluate whether the calculated reserve provides sufficient coverage of total inventory with no sales for the past 12 months. We record reserves as necessary based on our evaluations. We have not changed our methodology from prior years.
These estimates can significantly affect the outcome 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.
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.
Sales to specialty retailers that sell swimming pool supplies and customers who service large commercial installations are included in the appropriate existing product categories, and growth in these areas is reflected in the discussion above. In 2022, sales to base business retail customers increased 9% compared to 2021 and represented approximately 11% of our consolidated net sales.
Sales to specialty retailers that sell swimming pool supplies and customers who service large commercial installations are included in the appropriate existing product categories, and growth in these areas is reflected in the discussion above. In 2023, sales to retail customers decreased 10% compared to 2022 and represented approximately 14% of our consolidated net sales.
Our working capital obligations fluctuate during the year, driven primarily by seasonality and the timing of inventory purchases. 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. We have funded our capital expenditures and share repurchases in substantially the same manner.
Our working capital obligations fluctuate during the year, driven primarily by seasonality and the timing of inventory purchases. 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.
Our reserve for inventory obsolescence was $21.2 million at December 31, 2022 compared to $15.2 million at December 31, 2021. Our inventory turns, as calculated on a trailing four quarters basis, were 2.6 times at December 31, 2022 and 3.4 times at December 31, 2021.
Our reserve for inventory obsolescence was $23.5 million at December 31, 2023 compared to $21.2 million at December 31, 2022. Our inventory turns, as calculated on a trailing four quarters basis, were 2.7 times at December 31, 2023 and 2.6 times at December 31, 2022.
We prioritize our use of cash based on investing in our business, maintaining a prudent capital structure, including a modest amount of debt, and returning cash to our shareholders through dividends and share repurchases.
We have funded our capital expenditures and share repurchases in substantially the same manner. 42 We prioritize our use of cash based on investing in our business, maintaining a prudent capital structure, including a modest amount of debt, and returning cash to our shareholders through dividends and share repurchases.
In view of current trends and economic concerns, we established our outlook for 2023 based on reasonable expectations for industry demand, pricing and inflationary conditions, focused expense management and ongoing leverage of existing investments in our business and continuous process improvements.
In view of current trends, we established our outlook for 2024 based on reasonable expectations for industry demand, pricing and inflationary conditions, focused expense management, increased investment in our digital transformation initiatives and ongoing leverage of existing investments in our business and continuous process improvements.
Operating Expenses (in millions) Year Ended December 31, 2022 2021 Change Selling and administrative expenses $ 907.6 $ 784.3 $ 123.3 16% Operating expenses as a percentage of net sales 14.7 % 14.8 % Operating expenses increased 16%, or $123.3 million, to $907.6 million in 2022, up from $784.3 million in 2021.
Operating Expenses (in millions) Year Ended December 31, 2023 2022 Change Selling and administrative expenses $ 913.5 $ 907.6 $ 5.9 0.6% Operating expenses as a percentage of net sales 16.5 % 14.7 % Operating expenses increased 0.6%, or $5.8 million, to $913.5 million in 2023, up from $907.6 million in 2022.
We project that 2023 earnings will be in the range of $16.03 to $17.03 per diluted share, including an estimated $0.03 benefit from ASU 2016-09 during the first quarter of 2023.
We project that 2024 earnings will be in the range of $13.10 to $14.10 per diluted share, including an estimated $0.10 benefit from ASU 2016-09 during the first quarter of 2024.
We intend to continue to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives. At December 31, 2022, there was $1.0 billion outstanding, including a $500.0 million term loan, with a $4.8 million standby letter of credit outstanding and $225.5 million available for borrowing under the Credit Facility.
We intend to continue to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives. At December 31, 2023, there was $740.0 million outstanding, including a $487.5 million term loan, with a $16.0 million standby letter of credit outstanding and $481.5 million available for borrowing under the Credit Facility.
We record SPIP accruals based on our total expected EPS for the current fiscal year and earnings growth estimates for the succeeding two years.
We record SPIP accruals based on our total expected EPS for the current fiscal year and earnings growth estimates for the succeeding two years. We base our current fiscal year estimates on the same assumptions used for our annual bonus calculation.
Earnings per share increased 17% to $18.70 per diluted share compared to $15.97 per diluted share in 2021. Reconciliation of Non-GAAP Financial Measures The non-GAAP measures described below should be considered in the context of all of our other disclosures in this Form 10-K.
Earnings per share decreased 29% to $13.35 per diluted share compared to $18.70 per diluted share in 2022. 39 Reconciliation of Non-GAAP Financial Measures The non-GAAP measures described below should be considered in the context of all of our other disclosures in this Form 10-K.
Beginning in the second quarter of 2020, we experienced unprecedented demand as families spent more time at home and sought out opportunities to create or expand home-based outdoor living and entertainment spaces. This trend has had a positive impact on our financial performance over the past couple of years.
COVID-19 Pandemic and Other Economic Trends Beginning in the second quarter of 2020 during the COVID-19 pandemic, we experienced unprecedented demand as families spent more time at home and sought opportunities to create or expand home-based outdoor living and entertainment spaces. This trend had a positive impact on our financial performance during 2020 through 2022.
The most significant goodwill balance for a reporting unit was our Porpoise reporting unit with $403.5 million of goodwill. Other than our Porpoise reporting unit, the next most significant goodwill balance for a reporting unit was $12.1 million and the average goodwill balance per reporting unit was $1.2 million.
Our most significant goodwill balance of $403.5 million was related to our Porpoise Pool & Patio reporting unit and the next largest goodwill balance for a reporting unit was $12.1 million. The average goodwill balance per reporting unit was $2.8 million.
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 cost for products purchased and sold in future periods.
Although such changes would not affect the amounts we have recorded related to products already purchased, they may lower or raise our cost for products purchased and sold in future periods.
Our compensation packages include bonus plans that are specific to groups of eligible participants and their levels and areas of responsibility. The majority of our bonus plans consist of annual cash payments that are based primarily on objective performance criteria. We calculate bonuses based on the achievement of certain key measurable financial and operational results, including operating income.
Our compensation packages include bonus plans that are specific to groups of eligible participants and their levels and areas of responsibility. The majority of our bonus plans consist of annual cash payments that are based primarily on objective performance criteria.
In response, we proactively made significant investments in inventory in the last half of 2021 and early 2022 that enabled us to continue to meet strong customer demand and position ourselves to provide exceptional customer service.
In response, we proactively made significant investments in inventory in the last half of 2021 and early 2022 that enabled us to continue to meet strong customer demand and position ourselves to provide exceptional customer service. While we continued to be challenged by supply chain constraints through early 2022, supply chain dynamics improved beginning in the second quarter of 2022.
The table below summarizes the changes in our sales centers during 2022: December 31, 2021 410 Acquired location 1 New locations 10 Closed location (1) December 31, 2022 420 For information about our recent acquisitions, see Note 2 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K. 35 Net Sales (in millions) Year Ended December 31, 2022 2021 Change Net sales $ 6,179.7 $ 5,295.6 $ 884.1 17% Net sales increased 17% compared to 2021, with 12% of this increase resulting from base business sales growth.
The table below summarizes the changes in our sales centers during 2023: December 31, 2022 420 Acquired location 5 New locations 14 December 31, 2023 439 For information about our recent acquisitions, see Note 2 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K. 37 Net Sales (in millions) Year Ended December 31, 2023 2022 Change Net sales $ 5,541.6 $ 6,179.7 $ (638.1) (10)% Following sales growth of 17% in 2022, 35% in 2021 and 23% in 2020 (all compared to the prior year periods), our net sales in 2023 declined 10% compared to 2022.
Total net receivables, including pledged receivables, decreased 7% compared to December 31, 2021, primarily driven by slower December sales compared to last year. Our allowance for doubtful accounts was $9.5 million at December 31, 2022 and $5.9 million at December 31, 2021.
Total net receivables, including pledged receivables, decreased 2% compared to December 31, 2022, primarily due to lower sales in 2023. Our allowance for doubtful accounts was $11.7 million at December 31, 2023 and $9.5 million at December 31, 2022.
As of December 31, 2022, our fixed charge ratio equaled 9.57 (compared to 11.76 as of December 31, 2021) and TTM Rental Expense was $121.3 million.
As of December 31, 2023, our fixed charge ratio equaled 5.94 (compared to 9.57 as of December 31, 2022) and TTM Rental Expense was $92.0 million.
Without the benefits from ASU 2016-09, our effective tax rate was 25.1% and 24.7% for the years ended 2022 and 2021, respectively. Net Income and Earnings Per Share Net income increased 15% to $748.5 million in 2022 compared to $650.6 million in 2021.
Without the benefits from ASU 2016-09, our effective tax rate was 25.0% for the year ended 2023 and 25.1% for the year ended 2022. Net Income and Earnings Per Share Net income decreased 30% to $523.2 million in 2023 compared to $748.5 million in 2022.
Also see “Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995” prior to the heading “Risk Factors” in Item 1A. COVID-19 Pandemic and Other Economic Trends We continue to monitor the ongoing impact of the COVID-19 pandemic and its aftermath.
Also see “Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995” prior to the heading “Risk Factors” in Item 1A.
Our quarterly performance-based compensation expense and accrual balances may vary relative to actual annual bonus expense and payouts due to the following: • differences between estimated and actual performance; • our projections related to achievement of multiple-year performance objectives for our SPIP; and • the discretionary components of the bonus plans.
Our quarterly performance-based compensation expense and accrual balances may vary relative to actual annual bonus expense and payouts due to the following differences between estimated and actual performance and the discretionary components of the bonus plans. We generally make bonus payments at the end of February following the most recently completed fiscal year.
Under this facility, we can borrow up to $350.0 million between April through August and from $210.0 million to $340.0 million during the remaining months of the year. The Receivables Facility matures on November 1, 2024.
Receivables Securitization Facility Our two-year accounts receivable securitization facility (the Receivables Facility) offers us a lower-cost form of financing. Under this facility, we can borrow up to $350.0 million between April through August and from $210.0 million to $340.0 million during the remaining months of the year.
The fair value estimates used in our impairment test is determined using discounted cash flow models, which require the use of significant unobservable inputs, representative of a Level 3 fair value measurement. To estimate the fair value of our reporting units, we project future cash flows using management’s assumptions for sales growth rates, operating margins and discount 32 rates.
The fair value estimates used in our impairment test is determined using discounted cash flow models, which require the use of significant unobservable inputs, representative of a Level 3 fair value measurement.
Future Sources and Uses of Cash To supplement cash from operations as our primary source of working capital, we will continue to utilize our three major credit facilities, which are the Amended and Restated Revolving Credit Facility (the Credit Facility), the Term Facility (the Term Facility) and the Receivables Securitization Facility (the Receivables Facility).
For a discussion of our sources and uses of cash in 2021, see the Liquidity and Capital Resources – Sources and Uses of Cash section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2022 Annual Report on Form 10-K. 43 Future Sources and Uses of Cash To supplement cash from operations as our primary source of working capital, we will continue to utilize our three major credit facilities, which are the Amended and Restated Revolving Credit Facility (the Credit Facility), the Term Facility (the Term Facility) and the Receivables Securitization Facility (the Receivables Facility).
We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis.
Our Receivables Facility matures November 1, 2024 and is included in the table above according to its stated maturity date. On our Consolidated Balance Sheets, we classify the entire outstanding balance of the Receivables Facility as Long-term debt as we intend and have the ability to refinance the obligations on a long-term basis.
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.
Based on management’s current plans, we project capital expenditures for 2024 will average 1% to 1.5% of net sales. 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.
Sources and Uses of Cash The following table summarizes our cash flows (in thousands): Year Ended December 31, 2022 2021 Operating activities $ 484,854 $ 313,490 Investing activities (50,870) (849,614) Financing activities (411,658) 526,131 Cash provided by operations of $484.9 million for 2022 increased $171.4 million compared to 2021, primarily driven by an increase in net income and changes in working capital.
Sources and Uses of Cash The following table summarizes our cash flows (in thousands): Year Ended December 31, 2023 2022 Operating activities $ 888,229 $ 484,854 Investing activities (71,597) (50,870) Financing activities (798,132) (411,658) Cash provided by operations of $888.2 million for 2023 increased $403.4 million compared to 2022, primarily driven by positive changes in working capital, particularly as we sold through our prior year strategic inventory purchases, partially offset by lower net income.
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 a 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.
We perform a 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.
Despite the recent decline in residential construction activities, we believe that we are well positioned to benefit from the inherent long-term growth opportunities in our industry fueled by favorable population migration trends, strong housing demand dynamics, increased interest in backyards and outdoor living and new product developments.
We believe that we are well positioned to benefit from the inherent long-term growth opportunities in our industry fueled by favorable population migration trends, strong housing demand dynamics and product developments and technological advancements as consumers focus on more environmentally sustainable and energy-efficient products.
Weather Impacts on Fiscal Year 2022 to Fiscal Year 2021 Comparisons Overall, weather conditions in the first quarter of 2022 were less favorable than weather conditions in the first quarter of 2021. Sales benefited from above-average temperatures along much of the west and the east coast, although Texas experienced cooler-than-normal temperatures.
Comparatively, in the first quarter of 2022, overall weather conditions were generally favorable, and sales benefited from above-average temperatures along much of the west and the east coast, although Texas experienced cooler-than-normal temperatures. Overall, weather conditions unfavorably impacted sales by an estimated $30.0 million in the second quarter of 2023, particularly at the beginning of the second quarter.
The extent to which contributory effects from the COVID-19 pandemic and the evolving macroeconomic environment will continue to impact our business, financial condition and results of operations remains uncertain. 28 CRITICAL ACCOUNTING ESTIMATES Critical accounting estimates are those estimates made in accordance with U.S. generally accepted accounting principles that involve a significant level of estimation uncertainty and have had, or are reasonably likely to have, a material impact on our financial condition or results of operations.
In 2023, our inventory balances normalized with seasonal trends resulting in a 14% decrease compared to 2022. 31 CRITICAL ACCOUNTING ESTIMATES Critical accounting estimates are those estimates made in accordance with U.S. generally accepted accounting principles that involve a significant level of estimation uncertainty and have had, or are reasonably likely to have, a material impact on our financial condition or results of operations.
To the extent the carrying value of a reporting unit is greater than its estimated fair value, we record a goodwill impairment charge for the difference, up to the carrying value of the goodwill. We recognize any impairment loss in operating income.
If the carrying value of the reporting unit exceeds the fair value, we record a goodwill impairment charge for the difference, up to the carrying value of the goodwill.
For additional details regarding these facilities, see the summary descriptions below and more complete descriptions in Note 5 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K. 41 Credit Facility Our Credit Facility, as amended through December 30, 2021, provides for $1.25 billion in borrowing capacity consisting of a $750.0 million five-year unsecured revolving credit facility and a $500.0 million term loan facility.
For additional details regarding these facilities, see the summary descriptions below and more complete descriptions in Note 5 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.
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 arrangements are based on calendar year periods. We update our estimates for these arrangements at year end to reflect actual annual purchase or sales levels.
As a result, our estimated quarterly vendor program benefits accrual may include cumulative catch-up adjustments to reflect any changes in our estimates between reporting periods. These adjustments 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 arrangements are based on calendar year periods.
Management also establishes specific business improvement objectives for both our operating units and 31 corporate employees. The Compensation Committee approves objectives for annual bonus plans involving executive management. We also utilize our medium-term (three-year) Strategic Plan Incentive Program (SPIP) to provide senior management with an additional cash-based, pay-for-performance award based on the achievement of specified earnings growth objectives.
We have also utilized our medium-term (three-year) Strategic Plan Incentive Program (SPIP) to provide senior management with an additional cash-based, pay-for-performance award based on the achievement of specified earnings growth objectives. Payouts through the SPIP are based on three-year compound annual growth rates (CAGRs) of our diluted EPS.
The credit facility includes a $750.0 million revolving credit facility and sublimits for the issuance of swingline loans and standby letters of credit.
Credit Facility Our Credit Facility provides for $1.25 billion in borrowing capacity consisting of a $750.0 million five-year unsecured revolving credit facility and a $500.0 million term loan facility. The Credit Facility also includes sublimits for the issuance of swingline loans and standby letters of credit.
(Unaudited) QUARTER (in thousands) 2022 2021 First Second Third Fourth First Second Third Fourth Statement of Income Data Net sales $ 1,412,650 $ 2,055,818 $ 1,615,339 $ 1,095,920 $ 1,060,745 $ 1,787,833 $ 1,411,448 $ 1,035,557 Gross profit 447,189 666,804 503,687 315,731 301,131 551,685 441,899 322,376 Operating income 235,723 418,888 263,877 107,295 129,031 338,586 237,276 127,891 Net income 179,261 307,283 190,055 71,863 98,655 259,695 184,665 107,609 Net sales as a % of annual net sales 23 % 33 % 26 % 18 % 20 % 34 % 27 % 20 % Gross profit as a % of annual gross profit 23 % 34 % 26 % 16 % 19 % 34 % 27 % 20 % Operating income as a % of annual operating income 23 % 41 % 26 % 10 % 15 % 41 % 28 % 15 % Balance Sheet Data Total receivables, net $ 679,927 $ 756,585 $ 549,796 $ 351,448 $ 487,602 $ 585,566 $ 476,150 $ 376,571 Product inventories, net 1,641,155 1,579,101 1,539,572 1,591,060 977,228 894,654 1,043,407 1,339,100 Accounts payable 685,946 604,225 442,226 406,667 634,998 439,453 414,156 398,697 Total debt 1,505,073 1,595,398 1,512,545 1,386,803 433,171 423,116 362,819 1,183,350 Note: Due to rounding, the sum of quarterly percentage amounts may not equal 100%.
(Unaudited) QUARTER (in thousands) 2023 2022 First Second Third Fourth First Second Third Fourth Statement of Income Data Net sales $ 1,206,774 $ 1,857,363 $ 1,474,407 $ 1,003,050 $ 1,412,650 $ 2,055,818 $ 1,615,339 $ 1,095,920 Gross profit 369,755 567,783 428,731 293,775 447,189 666,804 503,687 315,731 Operating income 145,771 327,009 194,443 79,344 235,723 418,888 263,877 107,295 Net income 101,699 232,250 137,843 51,437 179,261 307,283 190,055 71,863 Net sales as a % of annual net sales 22 % 34 % 27 % 18 % 23 % 33 % 26 % 18 % Gross profit as a % of annual gross profit 22 % 34 % 26 % 18 % 23 % 34 % 26 % 16 % Operating income as a % of annual operating income 20 % 44 % 26 % 11 % 23 % 41 % 26 % 10 % Balance Sheet Data Total receivables, net $ 564,171 $ 630,950 $ 461,582 $ 342,910 $ 679,927 $ 756,585 $ 549,796 $ 351,448 Product inventories, net 1,686,683 1,392,886 1,259,308 1,365,466 1,641,155 1,579,101 1,539,572 1,591,060 Accounts payable 739,749 485,099 429,436 508,672 685,946 604,225 442,226 406,667 Total debt 1,365,750 1,184,586 1,033,897 1,053,320 1,505,073 1,595,398 1,512,545 1,386,803 Note: Due to rounding, the sum of quarterly percentage amounts may not equal 100%.
Our capital spending primarily relates to leasehold improvements, delivery and service vehicles and information technology. We focus our capital expenditure plans based on the needs of our sales centers. Historically, our capital expenditures have averaged roughly 1.0% of net sales. Capital expenditures were 0.7% of net sales in 2022 and 2021 and 0.6% of net sales in 2020.
Our capital spending primarily relates to leasehold improvements, delivery and service vehicles and information technology. We focus our capital expenditure plans based on the needs of our sales centers. In recent years, we have increased our investment in technology and automation enabling us to operate more efficiently and better serve our customers.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeTo calculate the potential impact in 2022 related to interest rate risk, we performed a sensitivity analysis assuming that we borrowed the monthly maximum available amount under the Credit Facility and the maximum amount available under the Receivables Facility. Our Term Facility, entered into on December 30, 2019, was fully drawn as of that date.
Biggest changeTo calculate the potential impact in 2023 related to interest rate risk, we performed a sensitivity analysis assuming that we borrowed the monthly maximum available amount under the Credit Facility, the maximum amount available under the Receivables Facility and the amount outstanding under our Term Facility.
The maximum amount 44 available under the Credit Facility is $1.25 billion and the maximum amount available under the Receivables Facility is $350.0 million. Failure of our swap counterparties would result in the loss of any potential benefit to us under our swap agreements.
The maximum amount available under the Credit Facility is $1.25 billion and the maximum amount available under the Receivables Facility is $350.0 million. Failure of our swap counterparties would result in the loss of any potential benefit to us under our swap agreements.
For information about our debt arrangements and interest rate swaps, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10‑K. In 2022, there was no interest rate risk related to the notional amounts under our interest rate swap contracts.
For information about our debt arrangements and interest rate swaps, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10‑K. In 2023, there was no interest rate risk related to the notional amounts under our interest rate swap contracts.
Functional Currencies Canada Canadian Dollar United Kingdom British Pound Belgium Euro Croatia Euro France Euro Germany Euro Italy Euro Portugal Euro Spain Euro Mexico Mexican Peso Australia Australian Dollar 45
Functional Currencies Canada Canadian Dollar United Kingdom British Pound Belgium Euro Croatia Euro France Euro Germany Euro Italy Euro Portugal Euro Spain Euro Mexico Mexican Peso Australia Australian Dollar 47
While our international operations, including Canada and Mexico, accounted for only 8% of total net sales in 2022, our exposure to currency rate fluctuations could be material in 2023 and future years to the extent that either currency rate changes are significant or that our international operations comprise a larger percentage of our consolidated results.
While our international operations, including Canada and Mexico, accounted for only 7% of total net sales in 2023, our exposure to currency rate fluctuations could be material in 2024 and future years to the extent that either currency rate changes are significant or that our international operations comprise a larger percentage of our consolidated results.
Based on this calculation, our pretax income would have decreased by approximately $12.5 million and earnings per share would have decreased by approximately $0.23 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2022).
Based on this calculation, our pretax income would have decreased by approximately $13.8 million and earnings per share would have decreased by approximately $0.26 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2023).

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