POOL CORP 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 49 Consolidated Statements of Income 52 Consolidated Statements of Comprehensive Income 53 Consolidated Balance Sheets 54 Consolidated Statements of Cash Flows 55 Consolidated Statements of Changes in Stockholders’ Equity 56 Notes to Consolidated Financial Statements 57 48 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of Pool Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Pool Corporation (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 25, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 49 Valuation of Goodwill Description of the Matter At December 31, 2021, the Company’s goodwill was $688.4 million. As discussed in Note 3 of the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. The Company’s goodwill is assigned to reporting units as of the acquisition date. Auditing management’s annual goodwill impairment test was complex and highly judgmental due to the estimation required to determine the fair value of the reporting units. In particular, the fair value estimate is sensitive to certain assumptions, such as changes in the weighted average cost of capital, revenue growth rate, operating margin, and terminal growth rate which are affected by expectations about future market or economic conditions. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s goodwill impairment review process, including controls over management’s review of the significant assumptions described above. To test the estimated fair value of the Company’s reporting units, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. We compared the significant assumptions used by management to current industry and economic trends and other relevant factors, such as historical results. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions. We also involved a specialist to assist in our evaluation of the valuation methodology applied by the Company and the significant assumptions used in estimating the fair value of the Company. In addition, we reviewed the allocation of the Company’s fair value to its reporting units and the comparison of the Company’s fair value to its market capitalization. Valuation of Intangible Assets Resulting from the Acquisition of Porpoise Pool & Patio Description of the Matter As discussed in Note 2 of the consolidated financial statements, the Company completed its acquisition of Porpoise Pool & Patio, Inc. (Porpoise) on December 16, 2021, for a total purchase price of approximately $788.7 million, net of cash acquired. The Company accounted for this transaction under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated, on a preliminary basis, to the assets acquired and liabilities assumed based on their respective fair values, including identified intangible assets of $301.0 million and resulting goodwill of $403.5 million. Auditing the Company’s accounting for the acquisition of Porpoise was complex due to the significant estimation required by management in determining the fair value of identified intangible assets, both definite and indefinite-lived, which primarily consisted of $109.0 million of customer relationships and $169.0 million of a brand name. The significant estimation was primarily due to the judgmental nature of the inputs to the valuation models used to measure the fair value of these intangible assets, as well as the sensitivity of the respective fair values to the underlying significant assumptions. The Company used the relief from royalty method to measure the fair value of the brand name and an excess earnings method to measure the fair value of the customer relationships. The significant assumptions used to estimate the fair value of the intangible assets included revenue growth rates, earnings metrics, and discount rates. These significant assumptions are forward-looking and could be affected by future economic and market conditions. 50 How We Addressed the Matter in Our Audit We obtained an understanding of the Company’s process to account for acquisitions, including management’s process to develop the valuation models and assumptions underlying the recognition and valuation of the identified intangible assets. To test the estimated fair value of the identified intangible assets, our audit procedures included, among others, involvement of a specialist to assist us in the evaluation of the Company’s valuation methodology and testing of the significant assumptions. For example, we compared the revenue growth rates to historical results and certain peer companies. Additionally, we tested the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. /s/ Ernst & Young LLP We have served as the Company’s auditor since 1994. New Orleans, Louisiana February 25, 2022 51 POOL CORPORATION Consolidated Statements of Income (In thousands, except per share data) Year Ended December 31, 2021 2020 2019 Net sales $ 5,295,584 $ 3,936,623 $ 3,199,517 Cost of sales 3,678,492 2,805,721 2,274,592 Gross profit 1,617,092 1,130,902 924,925 Selling and administrative expenses 786,808 659,931 583,679 (Recovery) impairment of goodwill and other assets ( 2,500 ) 6,944 — Operating income 832,784 464,027 341,246 Interest and other non-operating expenses, net 8,639 12,353 23,772 Income before income taxes and equity in earnings 824,145 451,674 317,474 Provision for income taxes 173,812 85,231 56,161 Equity in earnings in unconsolidated investments, net 291 295 262 Net income $ 650,624 $ 366,738 $ 261,575 Earnings per share attributable to common stockholders: Basic $ 16.21 $ 9.14 $ 6.57 Diluted $ 15.97 $ 8.97 $ 6.40 Weighted average common shares outstanding: Basic 39,876 40,106 39,833 Diluted 40,480 40,865 40,865 Cash dividends declared per common share $ 2.98 $ 2.29 $ 2.10 The accompanying Notes are an integral part of these Consolidated Financial Statements. 52 POOL CORPORATION Consolidated Statements of Comprehensive Income (In thousands) Year Ended December 31, 2021 2020 2019 Net income $ 650,624 $ 366,738 $ 261,575 Other comprehensive income (loss): Foreign currency translation adjustments ( 4,663 ) 5,210 2,295 Change in unrealized gains (losses) on interest rate swaps, net of the change in taxes of $( 3,733 ), $ 2,957 and $ 552 11,198 ( 8,870 ) ( 1,657 ) Total other comprehensive income (loss) 6,535 ( 3,660 ) 638 Comprehensive income $ 657,159 $ 363,078 $ 262,213 The accompanying Notes are an integral part of the Consolidated Financial Statements. 53 POOL CORPORATION Consolidated Balance Sheets (In thousands, except share data) December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 24,321 $ 34,128 Receivables, net 155,259 122,252 Receivables pledged under receivables facility 221,312 166,948 Product inventories, net 1,339,100 780,989 Prepaid expenses and other current assets 29,093 17,610 Total current assets 1,769,085 1,121,927 Property and equipment, net 179,008 108,241 Goodwill 688,364 268,167 Other intangible assets, net 312,814 12,181 Equity interest investments 1,231 1,292 Operating lease assets 241,662 205,875 Other assets 37,967 21,987 Total assets $ 3,230,131 $ 1,739,670 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 398,697 $ 266,753 Accrued expenses and other current liabilities 264,877 143,694 Short-term borrowings and current portion of long-term debt 11,772 11,869 Current operating lease liabilities 69,070 60,933 Total current liabilities 744,416 483,249 Deferred income taxes 35,840 27,653 Long-term debt, net 1,171,578 404,149 Other long-term liabilities 31,545 38,261 Non-current operating lease liabilities 175,359 146,888 Total liabilities 2,158,738 1,100,200 Stockholders’ equity: Common stock, $ 0.001 par value; 100,000,000 shares authorized; 40,192,901 shares issued and outstanding at December 31, 2021 and 40,232,210 shares issued and outstanding at December 31, 2020 40 40 Additional paid-in capital 551,963 519,579 Retained earnings 526,874 133,870 Accumulated other comprehensive loss ( 7,484 ) ( 14,019 ) Total stockholders’ equity 1,071,393 639,470 Total liabilities and stockholders’ equity $ 3,230,131 $ 1,739,670 The accompanying Notes are an integral part of these Consolidated Financial Statements. 54 POOL CORPORATION Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2021 2020 2019 Operating activities Net income $ 650,624 $ 366,738 $ 261,575 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 28,287 27,967 27,885 Amortization 1,739 1,431 1,389 Share-based compensation 15,187 14,516 13,472 Provision for doubtful accounts receivable, net of write-offs 1,134 ( 664 ) ( 710 ) Provision for inventory obsolescence, net of write-offs 3,798 2,362 1,310 Provision (benefit) for deferred income taxes 4,650 ( 2,542 ) 3,723 (Gains) losses on sales of property and equipment ( 93 ) 38 ( 85 ) Equity in earnings in unconsolidated investments, net ( 291 ) ( 295 ) ( 262 ) Net losses on foreign currency transactions 325 1,748 1,347 Impairment of goodwill and other assets — 6,944 — Other 473 410 3,313 Changes in operating assets and liabilities, net of effects of acquisitions: Receivables ( 79,940 ) ( 38,688 ) ( 15,691 ) Product inventories ( 525,207 ) ( 42,447 ) ( 14,165 ) Prepaid expenses and other assets ( 51,199 ) ( 13,744 ) ( 4,218 ) Accounts payable 114,893 ( 9,212 ) 16,860 Accrued expenses and other current liabilities 149,110 83,019 3,033 Net cash provided by operating activities 313,490 397,581 298,776 Investing activities Acquisition of businesses, net of cash acquired ( 811,956 ) ( 124,587 ) ( 8,901 ) Purchases of property and equipment, net of sale proceeds ( 37,658 ) ( 21,702 ) ( 33,362 ) Net cash used in investing activities ( 849,614 ) ( 146,289 ) ( 42,263 ) Financing activities Proceeds from revolving line of credit 1,438,408 1,053,968 1,066,529 Payments on revolving line of credit ( 974,506 ) ( 1,145,616 ) ( 1,415,988 ) Proceeds from term loan under credit facility 250,000 — — Proceeds from asset-backed financing 495,000 326,700 189,000 Payments on asset-backed financing ( 430,000 ) ( 321,700 ) ( 182,500 ) Proceeds from term facility — — 185,000 Payments on term facility ( 9,250 ) ( 9,250 ) — Proceeds from short-term borrowings and current portion of long-term debt 9,279 13,822 30,863 Payments on short-term borrowings and current portion of long-term debt ( 9,377 ) ( 13,698 ) ( 28,286 ) Payments of deferred financing costs ( 2,638 ) ( 12 ) ( 406 ) Payments on deferred and contingent acquisition consideration ( 362 ) ( 281 ) ( 312 ) Proceeds from stock issued under share-based compensation plans 17,197 19,824 18,574 Payments of cash dividends ( 119,581 ) ( 91,929 ) ( 83,772 ) Purchases of treasury stock ( 138,039 ) ( 76,199 ) ( 23,188 ) Net cash provided by (used in) financing activities 526,131 ( 244,371 ) ( 244,486 ) Effect of exchange rate changes on cash and cash equivalents 186 ( 1,376 ) 198 Change in cash and cash equivalents ( 9,807 ) 5,545 12,225 Cash and cash equivalents at beginning of year 34,128 28,583 16,358 Cash and cash equivalents at end of year $ 24,321 $ 34,128 $ 28,583 The accompanying Notes are an integral part of these Consolidated Financial Statements. 55 POOL CORPORATION Consolidated Statements of Changes in Stockholders’ Equity (In thousands) Common Stock Additional Paid-In Retained Earnings Accumulated Other Comprehensive Shares Amount Capital (Deficit) Loss Total Balance at December 31, 2018 39,506 $ 40 $ 453,193 $ ( 218,646 ) $ ( 10,997 ) $ 223,590 Net income — — — 261,575 — 261,575 Foreign currency translation — — — — 2,295 2,295 Interest rate swaps, net of the change in taxes of $ 552 — — — — ( 1,657 ) ( 1,657 ) Repurchases of common stock, net of retirements ( 155 ) — — ( 23,188 ) — ( 23,188 ) Share-based compensation — — 13,472 — — 13,472 Adoption of ASU 2016-02 — — — ( 709 ) — ( 709 ) Issuance of stock under share-based compensation plans 723 — 18,574 — — 18,574 Declaration of cash dividends — — — ( 83,772 ) — ( 83,772 ) Balance at December 31, 2019 40,074 40 485,239 ( 64,740 ) ( 10,359 ) 410,180 Net income — — — 366,738 — 366,738 Foreign currency translation — — — — 5,210 5,210 Interest rate swaps, net of the change in taxes of $ 2,957 — — — — ( 8,870 ) ( 8,870 ) Repurchases of common stock, net of retirements ( 401 ) — — ( 76,199 ) — ( 76,199 ) Share-based compensation — — 14,516 — — 14,516 Issuance of stock under share-based compensation plans 559 — 19,824 — — 19,824 Declaration of cash dividends — — — ( 91,929 ) — ( 91,929 ) Balance at December 31, 2020 40,232 40 519,579 133,870 ( 14,019 ) 639,470 Net income — — — 650,624 — 650,624 Foreign currency translation — — — — ( 4,663 ) ( 4,663 ) Interest rate swaps, net of the change in taxes of $( 3,733 ) — — — — 11,198 11,198 Repurchases of common stock, net of retirements ( 360 ) — — ( 138,039 ) — ( 138,039 ) Share-based compensation — — 15,187 — — 15,187 Issuance of stock under share-based compensation plans 321 — 17,197 — — 17,197 Declaration of cash dividends — — — ( 119,581 ) — ( 119,581 ) Balance at December 31, 2021 40,193 $ 40 $ 551,963 $ 526,874 $ ( 7,484 ) $ 1,071,393 The accompanying Notes are an integral part of these Consolidated Financial Statements. 56 POOL CORPORATION Notes to Consolidated Financial Statements Note 1 - Organization and Summary of Significant Accounting Policies Description of Business As of December 31, 2021, Pool Corporation and our subsidiaries (the Company , which may be referred to as we, us or our ) operated 410 sales centers in North America, Europe and Australia from which we sell swimming pool supplies, equipment and related leisure products, irrigation and landscape products and hardscape, tile and stone products to pool builders, retail stores, service companies, landscape contractors and others. We distribute products through five networks: SCP Distributors (SCP), Superior Pool Products (Superior), Horizon Distributors (Horizon), National Pool Tile (NPT) and Sun Wholesale Supply (Sun Wholesale). Basis of Presentation and Principles of Consolidation We prepared the Consolidated Financial Statements following U.S. generally accepted accounting principles (GAAP) and the requirements of the Securities and Exchange Commission (SEC). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. The Consolidated Financial Statements include the accounts of Pool Corporation and our subsidiaries. All of our subsidiaries are wholly owned. All significant intercompany accounts and intercompany transactions have been eliminated. Use of Estimates To prepare financial statements that conform to GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Our most significant estimates relate to the allowance for doubtful accounts, inventory obsolescence reserves, vendor programs, income taxes, performance-based compensation accruals, goodwill impairment evaluations and the valuation of intangible assets from our recent acquisition of Porpoise Pool & Patio, Inc. We continually review our estimates and make adjustments as necessary, but actual results could be significantly different from what we expected when we made these estimates. Newly Adopted Accounting Pronouncements On January 1, 2021, we adopted Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes . This new standard simplified the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. Most amendments were required to be applied on a prospective basis, while certain amendments were required to be applied on a retrospective or modified retrospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements or related disclosures, and we do not expect a material impact in future periods. On January 1, 2020, we adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and all related amendments, which are codified into Accounting Standards Codification (ASC) 326, using the cumulative-effect transition method related to our trade receivables. This new standard changes the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities are required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination for most financing receivables. The adoption of this standard did not have a material impact on our financial position or results of operations, and we do not expect the adoption of this guidance to have a material effect on our results of operations in future periods. As the impact from adoption was not material, we did not recognize an adjustment to the beginning balance of retained earnings. 57 We adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, for our interim impairment tests performed in the period ended March 31, 2020. This new standard eliminated the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (commonly referred to as Step 2 under the previous guidance). Rather, the measurement of a goodwill impairment charge is based on the excess of a reporting unit’s carrying value over its fair value (Step 1 under the previous guidance). The impact of the new standard is dependent on the specific facts and circumstances of individual impairments, if any. The adoption of this guidance did not impact our results of operations, statement of financial position or cash flows. On January 1, 2020, we adopted ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, on a prospective basis. This new standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The adoption of this guidance did not materially impact our results of operations, statement of financial position or cash flows. Segment Reporting Since all of our sales centers have similar operations and share similar economic characteristics, we aggregate our sales centers into a single reportable segment. These similarities include (i) the nature of our products and services, (ii) the types of customers we sell to and (iii) the distribution methods we use. Our chief operating decision maker (CODM) evaluates each sales center based on individual performance that includes both financial and operational measures. These measures include operating income growth and accounts receivable and inventory management criteria. Each sales center manager and eligible field employee earns performance-based compensation based on these measures developed at the sales center level. A bottom-up approach is used to develop the operating budget for each individual sales center. The CODM approves the budget and routinely monitors budget to actual results for each sales center. Additionally, our CODM makes resource allocation decisions primarily on a sales center-by-sales center basis. No single sales center meets any of the quantitative thresholds (10% of revenues, profit or assets) for separately reporting information about an operating segment. We do not track sales by product lines and product categories on a consolidated basis. We lack readily available financial information due to the number of our product lines and product categories and the fact that we make ongoing changes to product classifications within these groups, thus making it impracticable to report our sales by product category. Seasonality and Weather Our business is seasonal and weather is one of the principal external factors affecting our business. In general, sales and net income are highest during the second and third quarters, which represent the peak months of swimming pool use, pool and irrigation installation and remodeling and repair activities. Sales are lower during the first and fourth quarters. Revenue Recognition We recognize a sale when a customer obtains control of the product, and we record the amount that reflects the consideration we expect to receive in exchange for such product. We recognize a sale when a customer picks up product at any sales center, when we deliver product to their premises or job sites via our trucks or when we present the product to a third-party carrier. For bill and hold sales, we determine when the customer obtains control of the product on a case-by-case basis to determine the amount of revenue to recognize each period. We consider our distribution of products to represent one reportable revenue stream. Our products are similar in nature, and our revenue recognition policy is the same across our distribution networks. Our customers share similar characteristics and purchase products across all categories. We recognize revenue when our customers take control of our products. We include shipping and handling fees billed to customers as freight out income within net sales. 58 We measure revenue as the amount of consideration we expect to receive in exchange for transferring our products. Consideration may vary due to volume incentives and expected customer returns. We offer volume incentives to some of our customers and account for these incentives as a reduction of sales. We estimate the amount of volume incentives earned based on our estimate of cumulative sales for the fiscal year relative to our customers’ progress toward achieving minimum purchase requirements. We record customer returns, including those associated with customer early buy programs, as a reduction of sales. Based on available information related to our customers’ returns, we record an allowance for estimated returns, which historically has not been material. We regularly review our marketing programs, coupons and customary business practices to determine if any variable consideration exists under ASC 606. Other items that we record as reductions to sales include cash discounts, pricing adjustments and credit card fees related to customer payments. The majority of our sales transactions do not contain additional performance obligations after delivery; therefore, we do not have multiple performance obligations for which to allocate the transaction price. We recognize shipping and handling costs associated with outbound freight in selling and administrative expenses. We report sales net of tax amounts that we collect from our customers and remit to governmental authorities. These tax amounts may include, but are not limited to, sales, use, value-added and some excise taxes. Vendor Programs Many of our arrangements with our vendors provide for us to receive specified amounts of consideration when we achieve any of a number of measures. These measures are generally related to the volume level of purchases from our vendors, or our net cost of products sold, and may include negotiated pricing arrangements. We account for vendor programs as a reduction of the prices of the vendors’ products and as a reduction of inventory until we sell the products, at which time such considerations are recognized as a reduction of Cost of sales on our Consolidated Statements of Income. Throughout the year, we estimate the amount earned based on our expectation of total purchases for the fiscal year relative to the purchase levels that mark our progress toward earning each program. We accrue vendor benefits on a monthly basis using these estimates, provided that we determine they are probable and reasonably estimable. We continually revise these estimates to reflect actual credits earned based on actual purchase levels and trends related to sales and purchasing mix. When we make adjustments to our estimates, we determine whether any portion of the adjustment impacts the amount of vendor credits that are deferred in inventory. We recognize changes in our estimates as a cumulative catch-up adjustment to the amounts recognized to date in our Consolidated Financial Statements. Shipping and Handling Costs We record shipping and handling costs associated with inbound freight as cost of sales. The table below presents shipping and handling costs associated with outbound freight, which we include in selling and administrative expenses (in thousands): 2021 2020 2019 $ 75,411 $ 59,224 $ 51,580 Share-Based Compensation We record share-based compensation for stock options and other share-based awards based on the estimated fair value as measured on the grant date. For stock option awards, we use a Black-Scholes model for estimating the grant date fair value. For additional discussion of share-based compensation, see Note 6. Advertising Costs We expense advertising costs when incurred. The table below presents advertising expense for the past three years (in thousands): 2021 2020 2019 $ 9,409 $ 6,755 $ 7,842 59 Income Taxes We reduce federal and state income taxes payable by the tax benefits associated with the exercise of nonqualified stock options and the lapse of restrictions on restricted stock awards. To the extent realized tax deductions exceed the amount of previously recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. We record all excess tax benefits as a component of income tax benefit or expense in the income statement in the period in which stock options are exercised or restrictions on stock awards lapse. We record Global Intangible Low Tax Income (GILTI) on foreign earnings as period costs if and when incurred, although we have not realized any impacts since the December 2017 enactment of U.S. tax reform. For additional information regarding income taxes, see Note 7. Equity Method Investments We account for our 50 % investment in Northpark Corporate Center, LLC (NCC) using the equity method of accounting. Accordingly, we report our share of income or loss based on our ownership interest in this investment. Earnings Per Share We calculate basic and diluted earnings per share using the two-class method. Earnings per share under the two-class method is calculated using net income attributable to common stockholders, which is net income reduced by earnings allocated to participating securities. Our participating securities include share-based payment awards that contain a non-forfeitable right to receive dividends and are considered to participate in undistributed earnings with common shareholders. Diluted EPS reflects the dilutive effects of potentially dilutive securities, which include in-the-money outstanding stock options and shares to be purchased under our employee stock purchase plan. Using the treasury stock method, the effect of dilutive securities includes these additional shares of common stock that would have been outstanding based on the assumption that these potentially dilutive securities had been issued. For additional discussion of earnings per share, see Note 8. Foreign Currency The functional currency of each of our foreign subsidiaries is its applicable local currency. We translate our foreign subsidiary financial statements into U.S. dollars based on published exchange rates. We include these translation adjustments as a component of Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. We include realized transaction gains and losses that arise from exchange rate fluctuations in Interest and other non-operating expenses, net on the Consolidated Statements of Income. We realized net foreign currency transaction losses of $ 0.3 million in 2021, $ 1.7 million in 2020 and $ 1.3 million in 2019. Our net foreign currency transaction loss in 2019 included a $ 0.9 million reclassification from Accumulated other comprehensive loss related to the closing of our sales center in Colombia. Fair Value Measurements Our assets and liabilities that are measured at fair value on a recurring basis include the unrealized gains or losses on our interest rate swap contracts and contingent consideration related to recent acquisitions. The three levels of the fair value hierarchy under the accounting guidance are described below: Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 Inputs to the valuation methodology include: • quoted prices for similar assets or liabilities in active markets; • quoted prices for identical or similar assets or liabilities in inactive markets; • inputs other than quoted prices that are observable for the asset or liability; or • inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. 60 Recurring Fair Value Measurements The table below presents the estimated fair values of our interest rate swap contracts, our forward-starting interest rate swap contracts and our contingent consideration liabilities (in thousands): Fair Value at December 31, 2021 2020 Level 2 Unrealized gains on interest rate swaps $ 6,054 $ 223 Unrealized losses on interest rate swaps 3,215 12,314 Level 3 Contingent consideration liabilities $ 985 $ 1,343 We include unrealized gains in Prepaid expenses and other current assets and unrealized losses in Accrued expenses and other current liabilities on the Consolidated Balance Sheets. As of December 31, 2021, our Consolidated Balance Sheets reflect $ 0.4 million in Accrued expenses and other current liabilities and $ 0.6 million in Other long-term liabilities related to our estimates for contingent consideration payouts. For determining the fair value of our interest rate swaps and forward-starting interest rate swap contracts, we use significant other observable market data or assumptions (Level 2 inputs) that we believe market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk. Our fair value estimates reflect an income approach based on the terms of the interest rate swap contracts and inputs corroborated by observable market data including interest rate curves. The carrying values of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments. The carrying value of long-term debt approximates fair value. Our determination of the estimated fair value reflects a discounted cash flow model using our estimates, including assumptions related to borrowing rates (Level 3 inputs). Nonrecurring Fair Value Measurements In addition to our assets and liabilities that we measure at fair value on a recurring basis, our assets and liabilities are also subject to nonrecurring fair value measurements. Generally, our assets are recorded at fair value on a nonrecurring basis as a result of impairment charges or business combinations. On December 16, 2021, we acquired Porpoise Pool & Patio, Inc. for $ 788.7 million, net of cash acquired, subject to certain customary closing adjustments. Based on our preliminary purchase price allocation, we recognized tangible assets of $ 84.2 million, identifiable intangible assets of $ 301.0 million and resulting goodwill of $ 403.5 million. For additional discussion of goodwill and other intangible assets, see Note 3. In the first quarter of 2020, we recorded impairment charges of $ 6.9 million, which included non-cash goodwill and intangibles impairment charges of $ 4.4 million, equal to the total goodwill and intangibles carrying amounts of our Australian reporting units, and $ 2.5 million from a long-term note, as collectability was impacted by the COVID-19 pandemic. For additional discussion of goodwill and intangibles impairment, see Note 3. Derivatives and Hedging Activities At inception, we formally designate and document our interest rate swap contracts that qualify for hedge accounting as cash flow hedges of interest payments on variable rate borrowings. We formally assess, both at inception and at least quarterly, whether the financial instruments used in hedging transactions are effective at offsetting changes in cash flows of the related underlying exposure. To the extent our derivatives are effective in offsetting the variability of the hedged cash flows, we record the changes in the estimated fair value of our interest rate swap contracts to Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. 61 Our interest rate swap contracts and forward-starting interest rate swap contracts are subject to master netting arrangements. According to our accounting policy, we do not offset the fair values of assets with the fair values of liabilities related to these contracts. We recognize any differences between the variable interest rate in effect and the fixed interest rate per our swap contracts as an adjustment to interest expense over the life of the swaps. For our interest rate swap contracts currently in effect, a portion of the change in the estimated fair value between periods relates to future interest expense. Recognition of the change in fair value between periods attributable to accrued interest is reclassified from Accumulated other comprehensive income (loss) to Interest and other non-operating expenses, net on the Consolidated Statements of Income. These amounts were not material in any period presented. For additional discussion of our interest rate swaps, see Note 5. Cash Equivalents We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Credit Risk and Allowance for Doubtful Accounts We record trade receivables at the invoiced amounts less an allowance for doubtful accounts for estimated losses we may incur if customers do not pay. We perform periodic credit evaluations of our customers and we typically do not require collateral. Consistent with industry practices, we generally require payment from our North American customers within 30 days, except for sales under early buy programs for which we provide extended payment terms to qualified customers. Management estimates future losses based on historical bad debts, customer receivable balances, age of customer receivable balances, customers’ financial conditions and current and forecasted economic trends, including certain trends in the housing market, the availability of consumer credit and general economic conditions (as commonly measured by Gross Domestic Product or GDP). We monitor housing market trends through review of the House Price Index as published by the Federal Housing Finance Agency, which measures the movement of single-family house prices. At the end of each quarter, we perform a reserve analysis of all accounts with balances greater than $ 20,000 that are more than 60 days past due. During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. These write-offs are charged against our allowance for doubtful accounts. The following table summarizes the changes in our allowance for doubtful accounts for the past three years (in thousands): 2021 2020 2019 Balance at beginning of year $ 4,808 $ 5,472 $ 6,182 Bad debt expense 3,377 1,900 2,768 Write-offs, net of recoveries ( 2,243 ) ( 2,564 ) ( 3,478 ) Balance at end of year $ 5,942 $ 4,808 $ 5,472 Product Inventories and Reserve for Inventory Obsolescence Product inventories consist primarily of goods we purchase from manufacturers to sell to our customers. We record inventory at the lower of cost, using the average cost method, or net realizable value. We establish our reserve for inventory obsolescence based on inventory turns by class with particular emphasis on stock keeping units with the weakest sales over the expected sellable period, which is the previous 12 months for most products. The reserve is intended to reflect the net realizable value of inventory that we may not be able to sell at a profit. In evaluating the adequacy of our reserve for inventory obsolescence, we consider a combination of factors including: • the level of inventory in relation to historical sales by product, including inventory usage by classification based on product sales at both the sales center and on a company-wide basis; • changes in customer preferences or regulatory requirements; • seasonal fluctuations in inventory levels; • geographic location; and 62 • superseded products and new product offerings. We periodically adjust our reserve for inventory obsolescence as changes occur in the above-identified factors. The following table summarizes the changes in our reserve for inventory obsolescence for the past three years (in thousands): 2021 2020 2019 Balance at beginning of year $ 11,398 $ 9,036 $ 7,726 Provision for inventory write-downs 7,781 6,181 3,656 Deduction for inventory write-offs ( 3,983 ) ( 3,819 ) ( 2,346 ) Balance at end of year $ 15,196 $ 11,398 $ 9,036 Property and Equipment Property and equipment are stated at cost. We depreciate property and equipment on a straight-line basis over the following estimated useful lives: Buildings 40 years Leasehold improvements (1) 1 - 10 years Autos and trucks 3 - 6 years Machinery and equipment 3 - 15 years Computer equipment 3 - 7 years Furniture and fixtures 5 - 10 years (1) For substantial improvements made near the end of a lease term where we are reasonably certain the lease will be renewed, we amortize the leasehold improvement over the remaining life of the lease including the expected renewal period. The table below presents depreciation expense for the past three years (in thousands): 2021 2020 2019 $ 28,287 $ 27,967 $ 27,885 Acquisitions We use the acquisition method of accounting and recognize assets acquired and liabilities assumed at fair value as of the acquisition date. Any contingent assets acquired and contingent liabilities assumed are also recognized at fair value if we can reasonably estimate fair value during the measurement period (which cannot exceed one year from the acquisition date). We re-measure any contingent liabilities at fair value in each subsequent reporting period. We expense all acquisition-related costs as incurred, including any restructuring costs associated with a business combination. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is often required in estimating the fair value of assets acquired, particularly intangible assets. Our fair value estimates are based on available historical information and on expectations and assumptions about the future, considering the perspective of market participants. Significant assumptions related to the acquisition of Porpoise Pool & Patio, Inc. include expected revenue growth rates, earnings metrics and discount rates. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the underlying estimates and assumptions. If our initial acquisition accounting is incomplete by the end of the reporting period in which a business combination occurs, we report provisional amounts for incomplete items. Once we obtain information required to finalize the accounting for incomplete items, we adjust the provisional amounts recognized. We make adjustments to these provisional amounts during the measurement period. For all acquisitions, we include the results of operations in our Consolidated Financial Statements as of the acquisition date. For additional discussion of acquisitions, see Note 2. 63 Goodwill and Other Intangible Assets Goodwill represents the excess of the amount we paid to acquire a company over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. We test goodwill and other indefinite-lived intangible assets for impairment annually as of October 1st and at any other time when impairment indicators exist. To estimate the fair value of our reporting units, we project future cash flows using management’s assumptions for sales growth rates, operating margins, discount rates and earnings multiples. These assumptions are considered unobservable inputs (Level 3 inputs as defined in the accounting guidance). 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. Since we define an operating segment as an individual sales center and we do not have operations below the sales center level, our reporting unit is an individual sales center. For additional discussion of goodwill and other intangible assets, see Note 3. Receivables Securitization Facility Our accounts receivable securitization facility (the Receivables Facility) provides for the sale of certain of our receivables to a wholly owned subsidiary (the Securitization Subsidiary). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities. We account for the sale of the receivable interests as a secured borrowing on our Consolidated Balance Sheets. The receivables subject to the agreement collateralize the cash proceeds received from the third-party financial institutions. 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. We present the receivables that collateralize the cash proceeds separately as Receivables pledged under receivables facility on our Consolidated Balance Sheets. For additional discussion of the Receivables Facility, see Note 5. Self-Insurance We are self-insured for employee health benefits, workers’ compensation coverage, property and casualty, and automobile insurance. To limit our exposure, we also maintain excess and aggregate liability coverage. We establish self-insurance reserves based on estimates of claims incurred but not reported and information that we obtain from third-party service providers regarding known claims. Our management reviews these reserves based on consideration of various factors, including but not limited to the age of existing claims, estimated settlement amounts and other historical claims data. 64 Accumulated Other Comprehensive Loss The table below presents the components of our Accumulated other comprehensive loss balance (in thousands): December 31, 2021 2020 Foreign currency translation adjustments $ ( 9,580 ) $ ( 4,917 ) Unrealized gain (loss) on interest rate swaps, net of tax 2,096 ( 9,102 ) Accumulated other comprehensive loss $ ( 7,484 ) $ ( 14,019 ) Retained Earnings We account for the retirement of treasury share repurchases as a decrease to our Retained earnings on our Consolidated Balance Sheets. As of December 31, 2021, the retained earnings reflects cumulative net income, the cumulative impact of adjustments for changes in accounting pronouncements, treasury share retirements since the inception of our share repurchase programs of $ 1.7 billion and cumulative dividends of $ 790.4 million. Supplemental Cash Flow Information The following table presents supplemental disclosures to the accompanying Consolidated Statements of Cash Flows (in thousands): Year Ended December 31, 2021 2020 2019 Cash paid during the year for: Interest $ 10,023 $ 8,257 $ 20,960 Income taxes, net of refunds 83,953 81,792 51,076 Recent Accounting Pronouncements Pending Adoption The following table summarizes the remaining recent accounting pronouncements that we plan to adopt in future periods: Standard Description Effective Date Effect on Financial Statements and Other Significant Matters ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting Provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include: contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope . The amendments in this ASU refine the scope of ASC 848 and clarify some of its guidance as it relates to recent rate reform activities. The provisions of this update are only available until December 31, 2022, when the reference rate replacement activity is expected to be completed. We do not expect that there will be a material impact to the financial statements as a result of adopting this ASU. 65 Note 2 - Acquisitions 2021 Acquisitions On December 16, 2021, we acquired Porpoise Pool & Patio, Inc. (“Porpoise”) for $ 788.7 million, net of cash acquired, subject to certain customary closing adjustments. We preliminarily recognized goodwill of $ 403.5 million, other intangible assets of $ 301.0 million and tangible assets of $ 84.2 million, which included $ 57.4 million of acquired land and buildings. For additional discussion of goodwill and other intangible assets, see Note 3. The acquisition was funded with borrowings on our Credit Facility. Porpoise’s primary operations consist of Sun Wholesale Supply, Inc., a wholesale distributor of swimming pool and outdoor-living products, adding one distribution location in Florida. It also services Pinch A Penny, Inc., a franchisor of independently owned and operated pool and outdoor living-related specialty retail stores. The final allocation of the fair value of the Porpoise acquisition, including the allocation of goodwill and intangible assets, is not complete, but will be finalized within the allowable measurement period. We do not expect the future results of this acquisition to have a material impact on our financial position or results of operations. In December 2021, we acquired the distribution assets of Wingate Supply, Inc., a wholesale distributor of irrigation and landscape maintenance products, adding one location in Florida. In June 2021, we acquired the distribution assets of Vak Pak Builders Supply, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in Florida. In April 2021, we acquired Pool Source, LLC, a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in Tennessee. Other than Porpoise Pool & Patio, Inc., w e have completed our acquisition accounting for these acquisitions, subject to adjustments for standard holdback provisions per the terms of the purchase agreements, which are not material. 2020 Acquisitions In February 2020, we acquired the distribution assets of Master Tile Network LLC, a wholesale distributor of swimming pool tile and hardscape products, adding two locations in Texas, one location in Nevada and one location in Oklahoma. In September 2020, we acquired the distribution assets of Northeastern Swimming Pool Distributors, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding two locations in Ontario, Canada. In October 2020, we acquired Jet Line Products, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding three locations in New Jersey, three locations in New York, two locations in Texas and one location in Florida. In December 2020, we acquired TWC Distributors, Inc., a wholesale distributor of irrigation and landscape maintenance products, adding nine locations in Florida and one in Georgia. We have completed our acquisition accounting for these acquisitions. 2019 Acquisitions In January 2019, we acquired the distribution assets of W.W. Adcock, Inc., a wholesale distributor of swimming pool products, equipment, parts and supplies adding two locations in Pennsylvania, one location in North Carolina and one location in Virginia. We have completed our acquisition accounting for this acquisition. 66 Note 3 - Goodwill and Other Intangible Assets The table below presents changes in the carrying amount of goodwill and our accumulated impairment losses (in thousands): Goodwill (gross) at December 31, 2019 $ 198,475 Acquired goodwill 82,497 Foreign currency translation and other adjustments 584 Goodwill (gross) at December 31, 2020 281,556 Accumulated impairment losses at December 31, 2019 ( 9,879 ) Goodwill impairment ( 3,510 ) Accumulated impairment losses at December 31, 2020 ( 13,389 ) Goodwill (net) at December 31, 2020 $ 268,167 Goodwill (gross) at December 31, 2020 $ 281,556 Acquired goodwill (1) 422,126 Foreign currency translation and other adjustments ( 1,929 ) Goodwill (gross) at December 31, 2021 701,753 Accumulated impairment losses at December 31, 2020 ( 13,389 ) Goodwill impairment — Accumulated impairment losses at December 31, 2021 ( 13,389 ) Goodwill (net) at December 31, 2021 $ 688,364 (1) Primarily includes the acquisition of Porpoise Pool & Patio, Inc. On December 16, 2021, we acquired Porpoise Pool & Patio, Inc. (“Porpoise”) for $ 788.7 million, net of cash acquired, subject to certain customary closing adjustments. The purchase price of Porpoise was preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. Tangible assets acquired were $ 84.2 million, which included $ 57.4 million of acquired land and buildings. As a result of the acquisition, we recognized goodwill of $ 403.5 million, which represents anticipated cost synergies from combined operations. Other intangible assets of $ 301.0 million acquired as part of our acquisition of Porpoise included the following: • $ 169.0 million for the Pinch A Penny brand name, which was determined to be indefinite-lived; • $ 109.0 million for customer relationships and $ 22.0 million for franchise agreements, both of which were determined to have useful lives of 20 years; and • $ 1.0 million for a non-compete agreement. We determined the Pinch A Penny brand name to be indefinite-lived based on our plan of continued franchise expansion using the brand name and Pinch A Penny’s well-established reputation and recognized brand name within the swimming pool industry, including their competitive market position, and history of successful performance by branded stores. The fair value of intangible assets was determined using income methodologies. We valued the acquired brand name and franchise agreements using the relief from royalty method. For customer relationships, we used the multi-period excess earnings method. Significant assumptions (Level 3 inputs) used in developing these valuations included the estimated annual net cash flows for each intangible asset, royalty rates, the discount rate that appropriately reflects the risk inherent in each future cash flow stream and the assessment of each asset’s life cycle, among other factors. We determined the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions. The final allocation of the fair value of the Porpoise acquisition, including the allocation of goodwill and intangible assets, is not complete, but will be finalized within the allowable measurement period. In October 2021 and October 2020, we performed our annual goodwill impairment test and did not record any goodwill impairment at the reporting unit level. As of October 1, 2021, we had 247 reporting units with allocated goodwill balances. The most significant goodwill balance for a reporting unit was $ 12.1 million and the average goodwill balance per reporting unit was $ 1.1 million. 67 In the period ended March 31, 2020, we recorded impairment equal to the total goodwill and intangibles carrying amounts of our five Australian reporting units, which included goodwill impairment of $ 3.5 million and intangibles impairment, related to the Pool Systems tradename and trademark, of $ 0.9 million. We recorded these amounts in Impairment of goodwill and other assets on our Consolidated Statements of Income. We determined certain impairment triggers had occurred due to the impact of the COVID-19 pandemic on expected future operating cash flows, and performed interim goodwill impairment analyses, which included discounted cash flow analyses, and determined that the estimated fair values of our Australian reporting units no longer exceeded their carrying values. The determination of our reporting units’ goodwill and intangibles fair values includes numerous assumptions that are subject to various risks and uncertainties. The principal assumptions, all of which are considered Level 3 inputs, used in our cash flow analyses consisted of changes in market conditions, forecasted future operating results (including sales growth rates and operating margins) and discount rates (including our weighted-average cost of capital). Other intangible assets consisted of the following (in thousands): December 31, Weighted Average Useful Life 2021 2020 Intangibles Gross Accumulated Amortization Intangibles Net Intangibles Gross Accumulated Amortization Intangibles Net Horizon tradename $ 8,400 $ — $ 8,400 $ 8,400 $ — $ 8,400 Indefinite Pinch A Penny brand name 169,000 — 169,000 — — — Indefinite National Pool Tile (NPT) tradename 1,500 ( 1,037 ) 463 1,500 ( 962 ) 538 20 Non-compete agreements 8,096 ( 3,891 ) 4,205 6,917 ( 3,674 ) 3,243 4.58 Customer relationships 109,000 ( 214 ) 108,786 — — — 20 Franchise agreements 22,000 ( 40 ) 21,960 — — — 20 Total other intangibles $ 317,996 $ ( 5,182 ) $ 312,814 $ 16,817 $ ( 4,636 ) $ 12,181 The Horizon tradename and Pinch A Penny brand name each have an indefinite useful life and are not subject to amortization. However, we evaluate the useful life of these intangible assets and test for impairment annually. The NPT tradename, our non-compete agreements, customer relationships and franchise agreements have finite useful lives, and we amortize the estimated fair value of these agreements using the straight-line method over their respective useful lives. We have not identified any indicators of impairment related to these assets. The useful lives for our non-compete agreements are based on their contractual terms. Other intangible amortization expense was $ 1.3 million in 2021 and $ 1.0 million in both 2020 and 2019. The table below presents estimated amortization expense for other intangible assets for the next five years (in thousands): 2022 $ 7,854 2023 7,802 2024 7,426 2025 7,335 2026 6,932 68 Note 4 - Details of Certain Balance Sheet Accounts The table below presents additional information regarding certain balance sheet accounts (in thousands): December 31, 2021 2020 Receivables, net: Trade accounts $ 27,724 $ 33,553 Vendor programs 129,072 90,988 Other, net 4,405 2,519 Total receivables 161,201 127,060 Less: Allowance for doubtful accounts ( 5,942 ) ( 4,808 ) Receivables, net $ 155,259 $ 122,252 Prepaid expenses and other current assets: Prepaid expenses $ 21,889 $ 16,401 Other current assets 7,204 1,209 Prepaid expenses and other current assets $ 29,093 $ 17,610 Property and equipment, net: Land $ 19,863 $ 3,608 Buildings 54,503 7,348 Leasehold improvements 62,684 54,300 Autos and trucks 102,330 95,667 Machinery and equipment 82,897 73,353 Computer equipment 32,200 29,935 Furniture and fixtures 9,598 9,448 Fixed assets in progress 6,176 4,608 Total property and equipment 370,251 278,267 Less: Accumulated depreciation ( 191,243 ) ( 170,026 ) Property and equipment, net $ 179,008 $ 108,241 Accrued expenses and other current liabilities: Salaries and payroll deductions $ 25,882 $ 24,930 Performance-based compensation 76,255 59,897 Taxes payable 106,894 20,676 Unrealized losses on interest rate swaps 3,215 12,314 Other current liabilities 52,631 25,877 Accrued expenses and other current liabilities $ 264,877 $ 143,694 69 Note 5 - Debt The table below presents the components of our debt (in thousands): December 31, 2021 2020 Variable rate debt Short-term borrowings $ 953 $ — Current portion of long-term debt: Australian credit facility 10,819 11,869 Short-term borrowings and current portion of long-term debt 11,772 11,869 Long-term portion: Revolving credit facility 572,926 109,024 Term loan under credit facility 250,000 — Term facility 166,500 175,750 Receivables securitization facility 185,000 120,000 Less: financing costs, net 2,848 625 Long-term debt, net 1,171,578 404,149 Total debt $ 1,183,350 $ 416,018 Credit Facility On December 30, 2021, we entered into the First Amendment to the Second Amended and Restated Credit Agreement Credit Agreement, which increased the total borrowing capacity of our Credit Facility to $ 1.25 billion from $ 1.0 billion through the addition of an incremental delayed-draw term loan facility of $ 250.0 million. Subsequent to December 31, 2021, we drew the $ 250.0 million incremental term loan amount on January 4, 2022 and used the same amount to reduce our revolving borrowings. At that time, $ 413.4 million remained available for borrowing under the Credit Facility. Previously, on September 27, 2021, we entered into the Second Amended and Restated Credit Agreement (the “Credit Agreement”) among us, as U.S. Borrower, SCP Distributors Canada Inc., as Canadian Borrower, SCP International, Inc., as Euro Borrower, Wells Fargo Bank, National Association, as Administrative Agent (the “Agent”), and certain other lenders party thereto. The Credit Agreement amended and restated the predecessor senior credit facility (as amended, the “Credit Facility”) principally by increasing the total borrowing capacity from $ 750.0 million to $ 1.0 billion through the addition of a delayed-draw term loan facility of $ 250.0 million. We drew the entire $ 250.0 million delayed-draw term loan on December 15, 2021 and used the proceeds to fund our acquisition of Porpoise Pool & Patio, Inc. In addition, the Credit Agreement further amended and restated the Credit Facility in the following ways: • extending the maturity of the Credit Facility from September 29, 2022 to September 25, 2026; • making available lower interest rates; • increasing the amount of incremental facility commitments that we can request from $ 75.0 million to $ 250.0 million; and • providing additional capacity under certain negative covenants related to indebtedness, liens, investments, acquisitions, share repurchases and dividends. Term loans under the credit facility require quarterly amortization payments 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 September 25, 2026. All other terms of any such term loans would be substantially similar to those governing revolving credit loans under the Credit Agreement. The Credit Agreement continues to include a $ 750.0 million revolving credit facility and sublimits for the issuance of swingline loans and standby letters of credit. All obligations under the Credit Agreement continue to be guaranteed on an unsecured basis by substantially all of our existing and future domestic subsidiaries. The Credit Agreement also continues to contain various customary affirmative and negative covenants and events of default. The occurrence of any of these events of default would permit the lenders to, among other things, require immediate payment of all amounts outstanding under the Credit Agreement. 70 At December 31, 2021, there was $ 822.9 million outstanding, a $ 4.8 million standby letter of credit outstanding and $ 422.3 million available for borrowing under the Credit Facility. The weighted average effective interest rate for the Credit Facility as of December 31, 2021 was approximately 1.2 %, excluding commitment fees. Revolving and term borrowings under the Credit Facility bear interest, at our option, at either of the following and, in each case, plus an applicable margin: a. a base rate, which is the highest of (i) the Agent’s prime rate, (ii) the Federal Funds Rate plus 0.500 % and (iii) (a) prior to the USD LIBOR Transition Date, the Adjusted Eurocurrency Rate for Dollars for a one-month term in effect on such day plus 1.000 % and (b) on and after the USD LIBOR Transition Date, Daily Simple RFR for Dollars in effect on such day plus 1.000 %; or b. (i) prior to the USD LIBOR Transition Date, the Eurocurrency Rate and (ii) on or after the USD LIBOR Transition Date or a Benchmark Transition Event, the applicable Benchmark Replacement. Borrowings by the Canadian Borrower bear interest, at the Canadian Borrower’s option, at either of the following and, in each case, plus an applicable margin: a. a base rate, which is the greatest of (i) the Canadian Reference Bank prime rate and (ii) the Canadian Dealer Offered Rate (“CDOR”) plus 1.000 %; or b. CDOR. Borrowings by the Euro Borrower bear interest at the Eurocurrency rate plus an applicable margin. Borrowings under any swingline loans under the Credit Facility bear interest, at our option, at either of the following and, in each case, plus an applicable margin: a. the LIBOR Market Index Rate; or b. a base rate, which is the highest of (i) the Agent’s prime rate, (ii) the Federal Funds Rate plus 0.500 % and (iii) (a) prior to the USD LIBOR Transition Date, the Adjusted Eurocurrency Rate for Dollars for a one-month term in effect on such day plus 1.000 % and (b) on and after the USD LIBOR Transition Date, Daily Simple RFR for Dollars in effect on such day plus 1.000 % The interest rate margins on the borrowings and letters of credit issued under the Credit Agreement are based on our leverage ratio and will range from 0.000 % to 0.425 % on Base Rate and Canadian Base Rate loans and from 0.910 % to 1.425 % on CDOR, LIBOR and swingline loans (with all such rates being calculated in accordance with the terms and by reference to the definitions specified in the Credit Agreement). We are also required to pay an annual facility fee with respect to the lenders’ aggregate revolving credit agreement, the amount of which is based on our leverage ratio. Term Facility On December 30, 2019, we along with certain of our subsidiaries entered into a $ 185.0 million term facility (the “Term Facility”) with Bank of America, N.A. pursuant to a credit agreement subsequently amended on October 12, 2021, (as amended, the “Term Facility Agreement”) among us, as Borrower and Bank of America, N.A., as the Lender. Among other items, the amendment provided additional capacity under certain negative covenants related to indebtedness, liens, investments, acquisitions, share repurchases and dividends. The Term Facility matures on December 30, 2026. Under the Term Facility, we are required to make quarterly amortization payments in installments of 1.250 % of the Term Facility on the last business day of each quarter beginning in the first quarter of 2020. 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. The total of the quarterly payments will be equal to 33.75 % of the Term Facility with the final principal repayment, equal to 66.25 % of the Term Facility, due on the maturity date. Our obligations under the Term Facility are guaranteed on an unsecured basis by substantially all of our existing and future domestic subsidiaries. The Term Facility Agreement contains various customary affirmative and negative covenants and events of default. The occurrence of any of these events of default would permit the lenders to, among other things, require immediate payment of all amounts outstanding under the Term Facility Agreement. At December 31, 2021, the Term Facility had an outstanding balance of $ 166.5 million at a weighted average effective interest rate of 2.9 %. 71 Borrowings under the Term Facility bear interest, at our option, at either of the following and, in each case, plus an applicable margin: a. a base rate, which is the greatest of (i) the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System, as published by the Federal Reserve Bank of New York on the business day next succeeding such day plus 0.50 %, (ii) Bank of America’s “prime rate,” or (iii) the Eurodollar Rate (defined below) plus 1.00 %; or b. the Eurodollar Rate, which is the greater of (i) the rate per annum equal to the USD LIBOR as administered by the ICE Benchmark Administration, or a comparable or successor administrator approved by the Lender or (ii) a floor rate specified in the Term Facility Agreement. The interest rate margins on the borrowings under the Term Facility are based on our leverage ratio and will range from 0.000 % to 0.625 % on Base Rate borrowings and 1.000 % to 1.625 % on Eurodollar Rate borrowings (with all such rates being calculated in accordance with the terms and by reference to the definitions specified in the Term Facility Agreement). Receivables Securitization Facility On November 1, 2021, we and certain of our subsidiaries entered into an agreement (the “Amended Receivables Purchase Agreement”) amending our two -year receivable securitization facility. Among other items, the amendment removed seasonal facility limits and increased the maximum facility limit to $ 350.0 million in the months of April through June and from $ 175.0 million to $ 315.0 million during the remaining months of the year. We also extended the maturity date to November 1, 2023. 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. The Receivables Facility provides for the sale of certain of our receivables to a wholly owned subsidiary (the “Securitization Subsidiary”). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities. Upon payment of the receivables by customers, rather than remitting to the financial institutions the amounts collected, we retain such collections as proceeds for the sale of new receivables until payments become due to the financial institutions. The Receivables Facility is subject to terms and conditions (including representations, covenants and conditions precedent) customary for transactions of this type. Additionally, an amortization event will occur if we fail to meet certain covenants, including maintaining a maximum average total leverage ratio (average total funded debt/EBITDA) of 3.25 to 1.00 and a minimum fixed charge coverage ratio (EBITDAR/cash interest expense plus rental expense) of 2.25 to 1.00. At December 31, 2021, there was $ 185.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 0.9 %, excluding commitment fees. Depending on the funding source used by the financial institutions to purchase the receivables, amounts outstanding under the Receivables Facility bear interest at one of the following and, in each case, plus an applicable margin of 0.75 %: a. for financial institutions using the commercial paper market, commercial paper rates based on the applicable variable rates in the commercial paper market at the time of issuance; or b. for financial institutions not using the commercial paper market, LMIR. We also pay an unused fee of 0.35 % on the excess of the facility limit over the average daily capital outstanding. We pay this fee monthly in arrears. Australian Seasonal Credit Facility In the second quarter of 2017, Pool Systems Pty. Ltd. (PSL) entered into a credit facility to fund expansion and supplement working capital needs. The credit facility provides a borrowing capacity of AU$ 20.0 million. 72 Cash Pooling Arrangement Certain of our foreign subsidiaries entered into a cash pooling arrangement with a financial institution for cash management purposes. This arrangement allows the participating subsidiaries to withdraw cash from the financial institution to the extent that aggregate cash deposits held by these subsidiaries are available at the financial institution. To the extent the participating subsidiaries are in an overdraft position, such overdrafts are recorded as short-term borrowings under a committed cash overdraft facility. These borrowings bear interest at a variable rate based on 3-month Euro Interbank Offered Rate (EURIBOR), plus a fixed margin. We also pay a commitment fee on the average outstanding balance. This fee is paid annually in advance. Our borrowing capacity is € 14.0 million. Maturities of Long-Term Debt The table below presents maturities of long-term debt, excluding unamortized deferred financing costs, for the next five years (in thousands): 2022 $ 21,022 2023 200,500 2024 21,750 2025 28,000 2026 914,926 Interest Rate Swaps We currently have three interest rate swap contracts in place, two of which became effective on November 20, 2020 and terminate on September 29, 2022, and a third that became effective on February 26, 2021, and terminates on February 28, 2025. These swap contracts were previously forward-starting and convert the variable interest rate to a fixed interest rate on our variable rate borrowings. Interest expense related to the notional amounts under these swap contracts is based on the fixed rate plus the applicable margin on our variable rate borrowings. Changes in the estimated fair value of these interest rate swap contracts are recorded to Accumulated other comprehensive loss on the Consolidated Balance Sheets. The following table provides additional details related to these swap contracts: Derivative Inception Date Effective Date Termination Date Notional Amount (in millions) Fixed Interest Rate Interest rate swap 1 May 7, 2019 November 20, 2020 September 29, 2022 $ 75.0 2.0925 % Interest rate swap 2 July 25, 2019 November 20, 2020 September 29, 2022 $ 75.0 1.5500 % Interest rate swap 3 February 5, 2020 February 26, 2021 February 28, 2025 $ 150.0 1.3800 % We have entered into additional forward-starting interest rate swap contracts to extend the hedged period for future interest payments on our variable rate borrowings. These swap contracts will convert the variable interest rate to a fixed interest rate on our variable rate borrowings. The following table provides details related to each of our forward-starting interest rate swap contracts: Derivative Inception Date Effective Date Termination Date Notional Amount (in millions) Fixed Interest Rate Forward-starting interest rate swap 1 March 9, 2020 September 29, 2022 February 26, 2027 $ 150.0 0.7400 % Forward-starting interest rate swap 2 March 9, 2020 February 28, 2025 February 26, 2027 $ 150.0 0.8130 % The net difference between interest paid and interest received related to our swap agreements resulted in an incremental interest expense of $ 4.3 million in 2021 and $ 0.9 million in 2020 and a benefit of $ 0.3 million in 2019. Failure of our swap counterparties would result in the loss of any potential benefit to us under our swap agreements. In this case, we would still be obligated to pay the variable interest payments underlying our debt agreements. Additionally, failure of our swap counterparties would not eliminate our obligation to continue to make payments under our existing swap agreements if we continue to be in a net pay position. 73 Financial and Other Covenants The Credit Facility and Term Facility limit the declaration and payment of dividends on our common stock to a manner consistent with past practice, provided no default or event of default has occurred and is continuing, or would result from the payment of 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 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. Under the Credit Facility and Term Facility, we may repurchase shares of our common stock provided no default or event of default has occurred and is continuing, or would result from the repurchase of shares, and our maximum average total leverage ratio (determined on a pro forma basis) is less than 3.25 to 1.00. Other covenants include restrictions on our ability to grant liens, incur indebtedness, make investments, merge or consolidate, and sell or transfer assets. Failure to comply with any of our financial covenants or any other terms of the Credit Facility and the Term Facility could result in higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt. As of December 31, 2021, we were in compliance with all covenants and financial ratio requirements related to the Credit Facility, the Term Facility and the Receivables Facility. Deferred Financing Costs We capitalize financing costs we incur related to implementing and amending our debt arrangements. We record these costs as a reduction of Long-term debt, net on our Consolidated Balance Sheets and amortize them over the contractual life of the related debt arrangements. The table below summarizes changes in deferred financing costs for the past two years (in thousands): December 31, 2021 2020 Deferred financing costs: Balance at beginning of year $ 5,130 $ 5,118 Financing costs deferred 2,638 12 Write-off of fully amortized deferred financing costs ( 3,726 ) — Balance at end of year 4,042 5,130 Less: Accumulated amortization ( 1,194 ) ( 4,505 ) Deferred financing costs, net of accumulated amortization $ 2,848 $ 625 Note 6 - Share-Based Compensation Share-Based Plans Current Plan In May 2007, our shareholders approved the 2007 Long-Term Incentive Plan (the 2007 LTIP), which authorizes the Compensation Committee of our Board of Directors (the Board) to grant non-qualified stock options and restricted stock awards to employees, directors, consultants or advisors. In May 2016, our shareholders approved an amendment and restatement of the 2007 Long-Term Incentive Plan (the Amended 2007 LTIP) and increased the number of shares that may be issued to a total of 9,315,000 shares. As of December 31, 2021, we had 4,109,524 shares available for future issuance including 933,872 shares that may be issued as restricted stock. Stock options granted under the Amended 2007 LTIP have an exercise price equal to our stock’s closing market price on the grant date and expire ten years from the grant date. Restricted stock awards granted under the Amended 2007 LTIP are issued at no cost to the grantee. Both stock options and restricted stock awards vest over time depending on an employee’s length of service with the company. Share-based awards to our employees generally vest either five years from the grant date or on a three/five year split vest schedule, where half of the awards vest three years from the grant date and the remainder of the awards vest five years from the grant date. Share-based awards to our non-employee directors vest one year from the grant date. 74 Restricted stock awards to our employees contain performance-based criteria in addition to the service-based vesting criteria described above. The awards provide for a three -year performance period for the metric to be achieved. If the performance metric fails to be met, it may be extended by one or two years; however, if it is not met by the end of the extended performance period, then all shares of performance-based restricted stock will be immediately forfeited and canceled. For each of the performance-based grants from 2016 through 2019, we achieved the performance condition in the initial three-year performance period. For the performance-based grants in 2020 and 2021, we have concluded that the performance condition is probable to be attained in the initial three-year performance period. Stock Option Awards The following table summarizes stock option activity under our share-based plans for the year ended December 31, 2021: Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Balance at December 31, 2020 884,059 $ 91.49 Granted 44,750 332.91 Less: Exercised 274,253 52.64 Forfeited 2,939 207.30 Balance at December 31, 2021 651,617 $ 123.98 4.93 $ 288,028,501 Exercisable at December 31, 2021 376,780 $ 76.06 3.31 $ 184,599,877 The following table presents information about stock options outstanding and exercisable at December 31, 2021: Outstanding Stock Options Exercisable Stock Options Range of Exercise Prices Shares Weighted Average Remaining Contractual Term (Years) Weighted Average Exercise Price Shares Weighted Average Exercise Price $ 37.13 to $ 69.85 218,817 2.29 $ 59.66 218,817 $ 59.66 $ 69.86 to $ 138.03 257,995 5.05 108.93 156,309 97.51 $ 138.04 to $ 515.41 174,805 8.05 226.70 1,654 217.71 651,617 4.93 $ 123.98 376,780 $ 76.06 The following table summarizes the cash proceeds and tax benefits realized from the exercise of stock options: Year Ended December 31, (in thousands, except share amounts) 2021 2020 2019 Options exercised 274,253 482,361 640,475 Cash proceeds $ 14,435 $ 17,657 $ 16,839 Intrinsic value of options exercised $ 118,305 $ 116,794 $ 97,007 Tax benefits realized $ 29,576 $ 29,199 $ 24,252 We estimated the fair value of employee stock option awards at the grant date based on the assumptions summarized in the following table: Year Ended December 31, (Weighted average) 2021 2020 2019 Expected volatility 27.0 % 20.7 % 21.4 % Expected term 6.9 years 6.8 years 7.0 years Risk-free interest rate 1.00 % 1.22 % 2.52 % Expected dividend yield 1.15 % 1.30 % 1.30 % Grant date fair value $ 83.05 $ 42.52 $ 37.75 75 We calculated expected volatility over the expected term of the awards based on the historical volatility of our common stock. We use weekly price observations for our historical volatility calculation because we believe this provides the most appropriate measurement of volatility given the trading patterns of our common stock. We estimated the expected term based on the vesting period of the awards and our historical exercise activity for awards with similar characteristics. The risk-free interest rate is based on the U.S. Treasury zero-coupon issues with a remaining term approximating the expected term of the option. We determined the expected dividend yield based on the dividends we anticipate paying over the expected term. For purposes of recognizing share-based compensation expense, we ratably expense the estimated fair value of employee stock options over the options’ requisite service period. The requisite service period for our share-based awards is either the vesting period, or if shorter, the period from the grant date to the date the employee becomes eligible to retire under our share-based award agreements. We recognize compensation cost for awards with graded vesting using the graded vesting recognition method. We estimate a forfeiture rate to calculate our share-based compensation expense for our share-based awards based on an analysis of actual forfeitures. We continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors. The following table presents the total share-based compensation expense for stock option awards for the past three years (in thousands): 2021 2020 2019 Option grants share-based compensation expense $ 2,846 $ 2,842 $ 3,021 Option grants share-based compensation tax benefits 712 710 755 At December 31, 2021, the unamortized compensation expense related to stock option awards totaled $ 3.6 million. We anticipate recognizing this expense over a weighted average period of 2.8 years. Restricted Stock Awards The table below presents restricted stock award activity under our share-based plans for the year ended December 31, 2021: Shares Weighted Average Grant Date Fair Value Balance unvested at December 31, 2020 291,704 $ 153.12 Granted (at market price) (1) 40,597 335.80 Less: Vested 69,069 115.88 Forfeited 2,494 295.73 Balance unvested at December 31, 2021 260,738 $ 190.26 (1) The majority of these shares contain performance-based vesting conditions. At December 31, 2021, the unamortized compensation expense related to the restricted stock awards totaled $ 14.5 million. We anticipate recognizing this expense over a weighted average period of 3.0 years. The table below presents the total number of restricted stock awards that vested for the past three years and the related fair value of those awards (in thousands, except share amounts): 2021 2020 2019 Restricted stock awards - shares vested 69,069 77,294 75,143 Fair value of restricted stock awards vested $ 24,005 $ 16,813 $ 12,316 The following table presents the total share-based compensation expense for restricted stock awards for the past three years (in thousands): 2021 2020 2019 Restricted stock awards share-based compensation expense $ 11,543 $ 10,965 $ 10,026 76 Employee Stock Purchase Plan We maintain the Pool Corporation Amended and Restated Employee Stock Purchase Plan (the ESPP), which was last approved by the Board and our stockholders in 2016. Under the ESPP, employees who meet minimum age and length of service requirements may purchase stock at 85 % of the lower of: a. the closing price of our common stock at the end of a six month plan period ending either July 31 or January 31; or b. the average of the beginning and ending closing prices of our common stock for such six month period. No more than 956,250 shares of our common stock may be issued under the ESPP. For the two six month offering periods in each of the last three years, our employees purchased the following aggregate number of shares: 2021 2020 2019 8,649 10,929 12,716 The grant date fair value for the most recent ESPP purchase period ended July 31, 2021 was $ 121.82 per share. Share-based compensation expense related to our ESPP was $ 0.8 million in 2021, $ 0.7 million in 2020 and $ 0.4 million in 2019. Note 7 - Income Taxes Income before income taxes and equity in earnings is attributable to the following jurisdictions (in thousands): Year Ended December 31, 2021 2020 2019 United States $ 752,957 $ 428,857 $ 304,259 Foreign 71,188 22,817 13,215 Total $ 824,145 $ 451,674 $ 317,474 The provision for income taxes consisted of the following (in thousands): Year Ended December 31, 2021 2020 2019 Current: Federal $ 124,379 $ 67,093 $ 35,270 State and other 44,783 20,680 17,168 Total current provision for income taxes 169,162 87,773 52,438 Deferred: Federal 2,970 ( 1,298 ) 4,154 State and other 1,680 ( 1,244 ) ( 431 ) Total deferred provision for income taxes 4,650 ( 2,542 ) 3,723 Provision for income taxes $ 173,812 $ 85,231 $ 56,161 A reconciliation of the U.S. federal statutory tax rate to our effective tax rate on Income before income taxes and equity in earnings is as follows: Year Ended December 31, 2021 2020 2019 Federal statutory rate 21.00 % 21.00 % 21.00 % Change in valuation allowance ( 0.11 ) ( 0.22 ) 0.10 Stock-based compensation ( 3.67 ) ( 6.34 ) ( 7.40 ) Other, primarily state income tax rate 3.87 4.43 3.99 Total effective tax rate 21.09 % 18.87 % 17.69 % 77 We reduce federal and state income taxes payable by the tax benefits associated with the exercise of deductible nonqualified stock options and the lapse of restrictions on deductible restricted stock awards. To the extent realized tax deductions exceed the amount of previously recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. We record all excess tax benefits or deficiencies as income tax benefit or expense in the income statement. We recorded excess tax benefits of $ 30.0 million to our income tax provision in 2021, $ 28.6 million in 2020 and $ 23.5 million in 2019. The table below presents the components of our deferred tax assets and liabilities (in thousands): December 31, 2021 2020 Deferred tax assets: Product inventories $ 8,597 $ 6,110 Accrued expenses 3,105 4,101 Leases 59,457 50,301 Share-based compensation 8,981 8,730 Uncertain tax positions 2,792 3,266 Net operating losses 2,524 3,829 Interest rate swaps — 3,023 Other 3,839 3,628 Total non-current 89,295 82,988 Less: Valuation allowance ( 2,086 ) ( 3,166 ) Component reclassified for net presentation ( 86,113 ) ( 78,542 ) Total non-current, net 1,096 1,280 Total deferred tax assets 1,096 1,280 Deferred tax liabilities: Trade discounts on purchases 2,566 2,218 Prepaid expenses 4,226 3,379 Leases 58,146 49,004 Intangible assets, primarily goodwill 36,936 34,244 Depreciation 19,369 17,350 Interest rate swaps 710 — Total non-current 121,953 106,195 Component reclassified for net presentation ( 86,113 ) ( 78,542 ) Total non-current, net 35,840 27,653 Total deferred tax liabilities 35,840 27,653 Net deferred tax liability $ 34,744 $ 26,373 At December 31, 2021, certain of our international subsidiaries had tax loss carryforwards totaling approximately $ 8.6 million, which expire in various years after 2022. Deferred tax assets related to the tax loss carryforwards of these international subsidiaries were $ 2.5 million as of December 31, 2021 and $ 3.8 million as of December 31, 2020. We have recorded a corresponding valuation allowance of $ 1.8 million and $ 2.9 million in the respective years. 78 As of December 31, 2021, United States income taxes were not provided on earnings or cash balances of our foreign subsidiaries, outside of the provisions of the transition tax from U.S. tax reform enacted in December 2017. As we have historically invested or expect to invest the undistributed earnings indefinitely to fund current cash flow needs in the countries where held, additional income tax provisions may be required. 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. The following table summarizes the activity related to uncertain tax positions for the past three years (in thousands): 2021 2020 2019 Balance at beginning of year $ 15,553 $ 13,582 $ 12,179 Increases for tax positions taken during a prior period — 1,363 771 Increases for tax positions taken during the current period 3,518 2,721 2,354 Decreases resulting from the expiration of the statute of limitations 3,185 2,113 1,390 Decreases relating to settlements 2,589 — 332 Balance at end of year $ 13,297 $ 15,553 $ 13,582 The total amount of unrecognized tax benefits that, if recognized, would decrease the effective tax rate was $ 10.5 million at December 31, 2021 and $ 12.3 million at December 31, 2020. We record interest expense related to unrecognized tax benefits in Interest and other non-operating expenses, net, while we record related penalties in Selling and administrative expenses on our Consolidated Statements of Income. For unrecognized tax benefits, we had interest income of $ 0.6 million in 2021 and interest expense of $ 1.0 million in 2020 and $ 0.6 million in 2019. Accrued interest related to unrecognized tax benefits was approximately $ 1.6 million at December 31, 2021 and $ 2.7 million at December 31, 2020. We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2018. 79 Note 8 - Earnings Per Share We calculate basic and diluted earnings per share using the two-class method. Earnings per share under the two-class method is calculated using net income attributable to common stockholders, which is net income reduced by the earnings allocated to participating securities. Our participating securities include share-based payment awards that contain a non-forfeitable right to receive dividends and are considered to participate in undistributed earnings with common shareholders. Participating securities excluded from weighted average common shares outstanding were 268,000 for the year ended December 31, 2021. The table below presents the computation of earnings per share, including the reconciliation of basic and diluted weighted average shares outstanding (in thousands, except per share data): Year Ended December 31, 2021 2020 2019 Net income $ 650,624 $ 366,738 $ 261,575 Amounts allocated to participating securities ( 4,321 ) — — Net income attributable to common stockholders $ 646,303 $ 366,738 $ 261,575 Weighted average common shares outstanding: Basic 39,876 40,106 39,833 Effect of dilutive securities: Stock options and employee stock purchase plan 604 759 1,032 Diluted 40,480 40,865 40,865 Earnings per share attributable to common stockholders: Basic $ 16.21 $ 9.14 $ 6.57 Diluted $ 15.97 $ 8.97 $ 6.40 Anti-dilutive stock options excluded from diluted earnings per share computations (1) 1 — — (1) Since these options have exercise prices that are higher than the average market prices of our common stock, including them in the calculation would have an anti-dilutive effect on earnings per share. Note 9 - Commitments and Contingencies Commitments We lease facilities for our corporate and administrative offices, sales centers and centralized shipping locations under operating leases that expire in various years through 2036. Most of our leases contain five-year terms with renewal options that allow us to extend the lease term beyond the initial period, subject to terms agreed upon at lease inception. Based on our leasing practices and contract negotiations, we determined that we are not reasonably certain to exercise the renewal options and, as such, we have not included optional renewal periods in our measurement of operating lease assets, liabilities and expected lease terms. With our adoption of ASC 842, Leases , we elected to retain our existing assessment of whether an arrangement is or contains a lease, is classified as an operating or financing lease and contains initial direct costs. We also elected the practical expedients that allow us to exclude short-term leases from our Consolidated Balance Sheets and to combine lease and non-lease components. For leases with step rent provisions whereby the rental payments increase incrementally over the life of the lease, we recognize expense on a straight-line basis determined by the total lease payments over the lease term. To the extent we determine that future obligations related to real estate taxes, insurance and other lease components are variable, we exclude them from the measurement of our operating lease assets and liabilities. 80 Some of our real estate agreements include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. The table below presents rent expense associated with facility and vehicle operating leases for the past three years (in thousands): Lease Cost Classification 2021 2020 2019 Operating lease cost (1) Selling and administrative expenses $ 71,255 $ 63,141 $ 60,104 Variable lease cost Selling and administrative expenses $ 18,755 $ 16,700 $ 13,778 (1) Includes short-term lease cost, which is not material. Based on our lease portfolio as of December 31, 2021, the table below sets forth the approximate future lease payments related to operating leases with initial terms of one year or more (in thousands): 2022 $ 64,337 2023 57,806 2024 45,037 2025 34,803 2026 22,800 Thereafter 32,970 Total lease payments 257,753 Less: interest 13,324 Present value of lease liabilities $ 244,429 To calculate the present value of our lease liabilities, we determined our incremental borrowing rate based on the effective interest rate on our Credit Facility adjusted for a collateral feature similar to that of our leased properties, as we are unable to derive implicit rates from our existing leases. The table below presents the weighted-average remaining lease term (years) of our operating leases and the weighted-average discount rate used in the above calculation: December 31, Lease Term and Discount Rate for Operating Leases 2021 2020 2019 Weighted-average remaining lease term (years) 5.27 5.10 4.57 Weighted-average discount rate 2.57 % 2.99 % 3.41 % The table below presents the amount of cash paid for amounts included in the measurement of lease liabilities (in thousands): Year Ended December 31, 2021 2020 2019 Operating cash flows for lease liabilities $ 67,197 $ 60,723 $ 56,617 81 Contingencies From time to time, we are subject to various claims and litigation arising in the ordinary course of business, including product liability, personal injury, commercial, contract and employment matters. Each quarter, we evaluate developments related to claims and litigation and record a liability if we deem a loss to be probable and estimable. When evaluating these matters for accrual and disclosure, we consider factors such as historical experience, specific facts and claims asserted, the likelihood we will prevail and the magnitude of any potential loss. 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 claims and litigation matters will have a material adverse impact on our financial condition, results of operations or cash flows. We do not believe our exposure for any of these matters is material for disclosure, either individually or in the aggregate. Note 10 - Related Party Transactions Policy Our policy for related party transactions is included in our written Audit Committee Charter. This policy requires that our Audit Committee review and approve all related party transactions required to be disclosed in our Annual Proxy Statement or required to be approved based on Nasdaq rules. Transactions We lease corporate and administrative offices from NCC, an entity we have held a 50 % ownership interest in since 2005. NCC owns and operates an office building in Covington, Louisiana. We lease corporate and administrative offices from NCC, occupying approximately 60,000 square feet of office space, and we pay rent of $ 0.1 million per month. Our lease term ends May 2025. The table below presents rent expense associated with this lease for the past three years (in thousands): 2021 2020 2019 NCC $ 1,222 $ 1,222 $ 1,222 Note 11 - Employee Benefit Plans We offer a 401(k) savings and retirement plan, which is a defined contribution plan that provides benefits for substantially all employees who meet length of service requirements. Eligible employees are able to contribute up to 75 % of their compensation, subject to the federal dollar limit. For plan participants, we provide a matching contribution. We contribute a total maximum match on employee contributions of up to 4 % of their compensation, with a 100 % match on the first 3 % of compensation deferred and a 50 % match on deferrals between 3 % and 5 % of compensation. We also offer retirement plans for certain of our international entities. The plan funding is calculated as a percentage of the employee’s earnings and in compliance with local laws and practices. The related expense is not material and is included in the table below. We have a nonqualified deferred compensation plan that allows certain employees who occupy key management positions to defer salary and bonus amounts. This plan also provides a matching contribution similar to that provided under our 401(k) plan to the extent that a participant’s contributions to the 401(k) plan are limited by IRS deferral and compensation limitations. The total combined company matching contribution provided to a participant under the 401(k) plan and the nonqualified deferred compensation plan for any one year may not exceed 4 % of a participant’s salary and bonus. The employee and company matching contributions are invested in certain equity and fixed income securities based on individual employee elections. The table below sets forth our contributions for the past three years (in thousands): 2021 2020 2019 Defined contribution and international retirement plans $ 9,308 $ 8,259 $ 7,373 Deferred compensation plan 239 160 195 82 Note 12 - Quarterly Financial Data (Unaudited) The table below summarizes the unaudited quarterly results of operations for the past two years (in thousands, except per share data): Quarter 2021 2020 First Second Third Fourth First Second Third Fourth Net sales $ 1,060,745 $ 1,787,833 $ 1,411,448 $ 1,035,557 $ 677,288 $ 1,280,846 $ 1,139,229 $ 839,261 Gross profit 301,131 551,685 441,899 322,376 189,629 373,481 328,698 239,095 Net income 98,655 259,695 184,665 107,609 30,912 157,555 119,098 59,174 Earnings per share: Basic $ 2.45 $ 6.47 $ 4.60 $ 2.68 $ 0.77 $ 3.94 $ 2.97 $ 1.47 Diluted $ 2.42 $ 6.37 $ 4.54 $ 2.65 $ 0.75 $ 3.87 $ 2.92 $ 1.45 The sum of basic and diluted earnings per share for each of the quarters may not equal the total basic and diluted earnings per share for the annual periods because of rounding differences and a difference in the way that in-the-money stock options are considered from quarter to quarter. 83 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.