What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-02-25 · 209 added, 211 removed, 377 unchanged (53% of the section changed)

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Financial Results

Net sales increased 35% to $5.3 billion for the year ended December 31, 2021 compared to $3.9 billion in 2020, while base business sales increased 29%.

Our sales were driven by strong customer demand for outdoor living products throughout the year and benefited from inflation and warmer weather trends across most of the United States.

Net sales increased 17% to $6.2 billion for the year ended December 31, 2022 compared to $5.3 billion in 2021.

Base business sales increased 12%.

Net sales benefited approximately 10% from inflationary product cost increases and were aided by solid consumer demand for outdoor living products throughout the year.

Net sales were also unfavorably impacted 1% from currency exchange rate fluctuations, 1% from softness in our European markets and generally less favorable weather conditions on a year-over-year comparison.

Gross profit reached $1.9 billion for the year ended December 31, 2022, a 20% increase over gross profit of $1.6 billion in 2021.

Gross margin improved 180 basis points to 30.5% in 2021 compared to 28.7% in 2020, reflecting benefits from our actions to address inflation and manage supply chain disruptions, along with favorable impacts realized from increased purchase volumes.

Selling and administrative expenses (operating expenses), including a $2.5 million note recovery in 2021 and $6.9 million of impairment charges in 2020, increased 18%, or $117.4 million, to $784.3 million in 2021, with base business operating expenses up 12% over 2020.

Our operating expenses have increased as we reward our employees through performance-based compensation, in addition to increases in growth-driven labor, facility and freight costs, and investments in technology.

Gross margin improved 80 basis points to 31.3% in 2022 compared to 30.5% in 2021, reflecting benefits from acquisitions, increased pricing and supply chain management initiatives.

These increases were partially offset by $13.0 million recorded within Cost of sales in the fourth quarter of 2022 related to increased duties and tariffs for certain imported chemicals.

Given supply chain improvements through the latter half of 2022, we do not expect to import a significant portion of this product in 2023.

Selling and administrative expenses (operating expenses) increased 16%, or $123.3 million, to $907.6 million in 2022, including a 1% benefit from currency exchange rate fluctuations.

Base business operating expenses rose only 6% compared to 12% base business gross profit growth.

As a percentage of net sales, operating expenses declined 10 basis points to 14.7% in 2022 compared to 14.8% in 2021.

Operating income for the year increased 79% to $832.8 million, up from $464.0 million in 2020.

Our operating expenses have generally increased in line with sales growth to support our business, including recent acquisitions.

Operating income for the year increased 23% to $1.0 billion, up from $832.8 million in 2021.

Operating margin increased 90 basis points to 16.6% in 2022 compared to 15.7% in 2021.

Interest and other non-operating expenses, net for the year increased $32.3 million compared to 2021, primarily reflecting higher average debt levels and higher average interest rates.

We recorded a $10.8 million, or $0.27 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, for the year ended December 31, 2022 compared to a tax benefit of $30.0 million, or $0.74 per diluted share, realized in 2021.

Net income increased 15% to $748.5 million in 2022 compared to $650.6 million in 2021.

Adjusted net income, without the note recovery in 2021 and the prior year impact of impairments, both net of tax, increased 74% to $648.8 million.

Earnings per share increased 78% to a record $15.97 per diluted share compared to $8.97 per diluted share in 2020.

Earnings per share increased 17% to $18.70 per diluted share compared to $15.97 per diluted share in 2021.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 21% to $18.43 per diluted share compared to $15.23 per diluted share in 2021.

See RESULTS OF OPERATIONS below for definitions of our non-GAAP measures and reconciliations of our non-GAAP measures to GAAP measures.

COVID-19 Pandemic

We continue to monitor the ongoing impact of the COVID-19 pandemic, including the effects of recent notable variants of the virus.

The health, safety and security of our employees and the communities in which we operate remains our highest priority.

We have adapted our operations and implemented a number of measures to facilitate a safer sales center environment for both our customers and employees, which includes following best practices and guidelines from the Centers for Disease Control and Prevention (CDC).

We implemented enhanced hygiene and sanitation practices at our sales centers and at our corporate offices in 2020, and we continue to evaluate and maintain them.

We are designated as an essential business in almost all of our markets.

Our products are used to maintain and protect outdoor commercial, residential and municipal environments through chemically-balanced, virus and bacteria-free swimming pool water.

We also supply products used in the prevention of runoff, flood, fire and other natural disasters.

These products are essential to the health and safety of the general public.

In limited instances, we have had to close facilities as a result of government regulations, as well as COVID-19 cases.

The direct impact of any closures to date have not had a material impact on our operations or results.

Beginning in the second quarter of 2020 and through the end of 2021, we experienced unprecedented demand as families spent more time at home and sought out opportunities to create or expand home-based outdoor living and entertainment spaces.

While this trend has had a positive impact on our financial performance over the past couple of years, it is unclear what the long-term impact will be.

Our industry experienced constrained supply chain dynamics in 2021.

In response, we have been proactive in making significant investments in inventory to enable us to continue to meet strong customer demand and position ourselves to provide exceptional customer service into the 2022 season.

These trends, caused in large part from global disruptions related to the COVID-19 pandemic, may persist in the near-term.

We expect the impact of the pandemic on our business and financial results in 2022 will continue to vary by location and depend on numerous evolving factors that we are not able to accurately predict.

These factors include the duration and scope of the pandemic, global economic conditions during and after the pandemic, the re-institution of governmental actions that could restrict the activities of our customers, vendors or employees, the possibility of additional subsequent outbreaks, the sustainability of current home-centric trends and other changes in customer and supplier behavior in response to the pandemic.

Financial Position and Liquidity

Cash provided by operations was $484.9 million in 2022.

Cash provided by operations throughout the year helped fund the following initiatives:

• net working capital outflows of $392.3 million;

Cash provided by operations throughout the year helped fund a portion of the following initiatives:

• share repurchases, totaling $471.2 million for the year;

• net working capital outflows of $342.4 million;

• quarterly cash dividend payments to shareholders, totaling $150.6 million for the year;

• net capital expenditures of $43.6 million.

Total net receivables, including pledged receivables, increased 30% compared to December 31, 2020, primarily driven by our sales growth and 2021 acquisitions.

Total net receivables, including pledged receivables, decreased 7% compared to December 31, 2021, primarily driven by slower December sales compared to last year.

Our allowance for doubtful accounts was $9.5 million at December 31, 2022 and $5.9 million at December 31, 2021.

Our days sales outstanding ratio, as calculated on a trailing four quarters basis, was 26.9 days at December 31, 2022 and 25.6 days at December 31, 2021.

Inventory levels grew 71% to $1.3 billion at December 31, 2021 compared to $781.0 million at December 31, 2020, reflecting significant investments in inventory throughout the year to support increased demand and help manage supply chain pressures, in addition to impacts from inflation and acquisitions.

Inventory levels grew 19% to $1.6 billion at December 31, 2022 compared to $1.3 billion at December 31, 2021, reflecting increased purchasing to stock new locations and ensure product availability across our sales center network and impacts from inflation.

Our reserve for inventory obsolescence was $21.2 million at December 31, 2022 compared to $15.2 million at December 31, 2021.

Our inventory turns, as calculated on a trailing four quarters basis, were 2.6 times at December 31, 2022 and 3.4 times at December 31, 2021.

Our inventory turns at December 31, 2021 are consistent with average inventory turns over the past five years.

Accrued expenses and other current liabilities increased $121.2 million to $264.9 million in 2021, primarily reflecting an increase in deferred income tax payments of $79.5 million and a $16.4 million increase in accrued performance-based compensation.

As allowed for companies impacted by Hurricane Ida, we deferred our 2021 third and fourth quarter estimated federal tax payments, which were paid in February 2022.

Total debt outstanding of $1.2 billion at December 31, 2021 increased $767.3 million compared to December 31, 2020.

We utilized debt proceeds to fund our 2021 acquisitions, including Porpoise Pool & Patio, Inc., which we purchased on December 16, 2021 for $788.7 million, net of cash acquired.

Accrued expenses and other current liabilities decreased $96.4 million to $168.5 million at December 31, 2022.

As allowed for companies impacted by Hurricane Ida, we deferred our 2021 third and fourth quarter estimated federal tax payments totaling $79.5 million, which were paid in February 2022 and account for the majority of the decrease in accrued expenses and other current liabilities.

Total debt outstanding of $1.4 billion at December 31, 2022 increased $203.5 million compared to December 31, 2021 as we have utilized debt proceeds over the past year to fund a portion of our share repurchases, dividend payments and investments in working capital.

Current Trends and Outlook

Over the past two years, in response to the COVID-19 pandemic, families spent more time at home and sought out opportunities to create or expand home-based outdoor living and entertainment spaces, which resulted in an increase in new pool construction and greater expenditures for maintenance and remodeling products.

We believe that increased consumer spending on homes, including outdoor living spaces, will have longer term benefits as work-from-home trends persist or increase.

Over the past decade, homeowners investing in their homes, including backyard renovations, have flourished.

Steady increases in home values and lack of affordable new homes have prompted homeowners to stay in their homes longer and upgrade their home environments, including their backyards.

We expect that new pool and irrigation system construction levels will continue to grow incrementally, constrained by availability of construction labor.

However, we believe that consumer investments in outdoor living spaces will generate continued growth over the next several years.

Although some constraints exist around residential construction activities, we believe that we are well positioned to take advantage of both the near term market expansion and the inherent long term growth opportunities in our industry.

We have benefited from strong pool construction trends as robust demand fueled by the COVID-19 pandemic led to increased home investment trends.

We estimate that new pool construction increased to approximately 120,000 units in 2021 from 96,000 units in 2020, representing a 25% increase in new pool construction.

Favorable weather positively impacts industry growth by accelerating growth in any given year, expanding the number of available construction days, extending the pool season and pool usage and positively impacting demand for discretionary products.

Conversely, unfavorable weather impedes growth.

In establishing our outlook each year, we base our growth assumptions on normal weather conditions and do not incorporate alternative weather predictions into our guidance.

We established our initial outlook for 2022 based on reasonable expectations of organic industry and market share growth, ongoing leverage of existing investments in our business and continuous process improvements.

Impacts from the COVID-19 pandemic, coupled with heightened demand, could continue to adversely impact our supply chain, making it difficult to source and receive products needed to keep our customers adequately supplied.

Although supply constraints did not have a material impact on our business in 2021, it is difficult to predict the extent to which this could impact our business in 2022.

We expect to continue to gain market share through our comprehensive service and product offerings, which we continually diversify through internal sourcing initiatives and expansion into new markets.

We also plan to broaden our geographic presence by opening 8 to 10 new sales centers in 2022 and by making selective acquisitions when appropriate opportunities arise.

Over the past decade, consumers’ investments in their homes, including backyard renovations, have flourished.

Particularly, over the past couple of years, steady increases in home values and lack of affordable new homes have prompted homeowners to stay in their homes longer and upgrade their home environments, including their backyards.

Many families have spent more time at home and sought opportunities to create or expand home-based outdoor living and entertainment spaces.

These trends resulted in an increase in new pool construction and greater expenditures for maintenance and remodeling products.

More recent trends, including a lower number of permits issued for new pools, suggest that new construction activities are moderating after a period of significant growth.

In 2022, we estimate that new pool construction decreased 16% to approximately 98,000 units from 117,000 units in 2021 when new pool construction units had increased 22% over 2020.

We expect that consumers will continue to invest in outdoor living spaces, although at lower levels than observed in 2020 through the first half of 2022.

Despite the recent decline in residential construction activities, we believe that we are well positioned to benefit from the inherent long-term growth opportunities in our industry fueled by favorable population migration trends, strong housing demand dynamics, increased interest in backyards and outdoor living and new product developments.

Market conditions were challenged in 2022 by significant interest rate increases and geopolitical concerns.

Supply chain constraints combined with strong consumer demand led to high inflation.

General uncertainty around market and economic expectations for 2023 may significantly impact our industry.

The recent uptick in overall affordability concerns, including higher mortgage interest rates and product cost and labor inflation, may lead to consumer hesitancy resulting in some cyclical suppression of demand.

While an economic slowdown would impact new pool construction and remodeling (each of which comprises roughly 20% of our total consolidated business), non-discretionary maintenance product sales, which comprise about 60% of our business, are not expected to be significantly impacted.

In view of current trends and economic concerns, we established our outlook for 2023 based on reasonable expectations for industry demand, pricing and inflationary conditions, focused expense management and ongoing leverage of existing investments in our business and continuous process improvements.

We also plan to broaden our geographic presence by opening about 10 new sales centers in 2023 and by making selective acquisitions when appropriate opportunities arise.

We base our assumptions on normal weather conditions and do not incorporate alternative weather predictions into our guidance.

Favorable weather positively impacts industry activity by accelerating growth in any given year, expanding the number of available construction days, extending the pool season and pool usage and positively impacting demand for discretionary products.

Conversely, unfavorable weather typically impedes growth.

The following summarizes our outlook for 2023:

• We expect sales growth of 17% to 19%, impacted by the following factors and assumptions:

• We expect sales to be flat to down 3% compared to 2022, impacted by the following factors and assumptions:

◦ normal weather patterns for 2023;

◦ continued elevated demand for residential pool products, driven by home-centric trends;

◦ a benefit from construction backlogs depending on our customers’ building capacity, including the availability of labor, and weather;

◦ inflationary product cost increases, which generally pass through to customers, of approximately 9% to 10% (compared to 7% to 8% in 2021);

◦ estimated 5% growth from acquisitions completed throughout 2021;

◦ market share gains.

• We expect relatively neutral gross margin trends for the full year of 2022 compared to the full year of 2021 with modest improvements in the first half of 2022 and declines in the latter half of the year.

However, our gross margin trends are dependent on amounts and timing of inflationary price increases, sales growth expectations and product mix.

• We believe that tight labor and real estate markets will present challenges in managing expenses in 2022.

However, we project that operating expense growth in 2022 will be less than our gross profit growth.

We expect that our operating expense growth will reflect inflationary increases and incremental costs to support our investment initiatives, including increased investments in technology and expansion of our sales center network.

In 2022, we expect our effective tax rate will approximate 25.5%, without the impact of ASU 2016-09.

◦ inflationary product cost increases, which generally pass through to customers.

We expect sales to benefit approximately 4% from price increases announced by our major equipment manufacturers;

◦ sustained demand for pool maintenance products;

◦ a 15% to 20% decline in volumes of discretionary products used for swimming pool construction as pool construction activities return to 2019 levels (estimated at approximately 80,000 units);

◦ a 10% to 15% decline in volumes of products used in the remodeling, renovation and upgrading of swimming pools;

◦ a 1% benefit from expansion of the installed base of in-ground swimming pools;

◦ one less selling day in the third quarter and for the full year of 2023 compared to 2022.

• We project that sales for our Horizon sales centers, which are more affected by new home construction activities, may decline 5% to 10% compared to 2022.

Our Horizon sales centers comprised 8% of our total net sales in 2022.

• We expect that sales in Europe, which generated 4% of our total net sales in 2022, will be down approximately 10% to 20% compared to 2022 given the larger concentration of aftermarket versus maintenance activity in that market.

• By quarter, we expect low to mid-single digit declines in the first half of 2023 compared to the first half of 2022 and modest growth in the second half of the year.

• Our gross margin is dependent on amounts and timing of inflationary price increases, sales growth expectations and product mix.

We project gross margin for the full year of 2023 to be in line with our long-term outlook at approximately 30.0%.

We expect higher gross margin in the first half of 2023 compared to the latter half of the year as we sell through inventory purchased prior to recent price increases.

• We expect to leverage our existing infrastructure and manage discretionary spending to maintain expenses in line with sales expectations to achieve operating margin of approximately 15.0%.

In 2023, we expect our effective tax rate will be approximately 25.3% to 25.5%, without the impact of ASU 2016-09.

Our effective tax rate is dependent upon our results of operations and may change if actual results are different from our current expectations.

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We project that 2023 earnings will be in the range of $16.03 to $17.03 per diluted share, including an estimated $0.03 benefit from ASU 2016-09 during the first quarter of 2023.

We expect to continue to use cash to fund opportunistic share repurchases over the next year and to use cash for the payment of cash dividends as and when declared by our Board of Directors.

The forward-looking statements in this Current Trends and Outlook section are subject to significant risks and uncertainties, including the effects of the evolving COVID-19 pandemic, and the extent to which home-centric trends will continue, accelerate or reverse, the sensitivity of our business to weather conditions, changes in the economy, consumer discretionary spending or the housing market, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives or mass merchants and other risks detailed in Item 1A of this Form 10-K.

We expect to continue to use cash for the payment of cash dividends as and when declared by our Board and to fund opportunistic share repurchases over the next year.

The forward-looking statements in this Current Trends and Outlook section are subject to significant risks and uncertainties, including the sensitivity of our business to weather conditions;

changes in the economy, consumer discretionary spending, the housing market, interest or inflation rates;

our ability to maintain favorable relationships with suppliers and manufacturers;

the extent to which home-centric trends experienced during the height of the pandemic will moderate or reverse;

competition from other leisure product alternatives or mass merchants;

our ability to continue to execute our growth strategies;

changes in the regulatory environment;

new or additional taxes, duties or tariffs;

excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in Item 1A of this Form 10-K.

Also see “Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995” prior to the heading “Risk Factors” in Item 1A.

COVID-19 Pandemic and Other Economic Trends

We continue to monitor the ongoing impact of the COVID-19 pandemic and its aftermath.

Beginning in the second quarter of 2020, we experienced unprecedented demand as families spent more time at home and sought out opportunities to create or expand home-based outdoor living and entertainment spaces.

This trend has had a positive impact on our financial performance over the past couple of years.

As further described above, recent trends, including a lower number of permits issued for new pools, suggest that new construction activities are moderating.

Our industry experienced substantial supply chain constraints beginning in 2021.

In response, we proactively made significant investments in inventory in the last half of 2021 and early 2022 that enabled us to continue to meet strong customer demand and position ourselves to provide exceptional customer service.

While we continued to be challenged by supply chain constraints through early 2022, we observed improvements in our supply chain dynamics beginning in the second quarter of 2022.

Likewise, we expect inventory balances to normalize with seasonal trends as 2023 progresses.

The extent to which contributory effects from the COVID-19 pandemic and the evolving macroeconomic environment will continue to impact our business, financial condition and results of operations remains uncertain.

CRITICAL ACCOUNTING ESTIMATES

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At the end of each fiscal year, we prepare a hindsight analysis by comparing the prior year-end allowance for doubtful accounts balance to (i) current year write-offs and (ii) any significantly aged outstanding receivable balances.

Based on our hindsight analysis, we concluded that the prior year allowance was within a range of acceptable estimates and that our estimation methodology is appropriate.

Based on our most recent hindsight analysis, we concluded that the prior year allowance was within a range of acceptable estimates and that our estimation methodology is appropriate.

If the balance of the accounts receivable reserve increased or decreased by 20% at December 31, 2022, pretax income would change by approximately $1.9 million and earnings per share would change by approximately $0.04 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2022).

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• non-stock special order items.

There is little risk of obsolescence for our highest sales velocity items, which represent approximately 80% of net sales at the sales center, because these products generally turn quickly.

There is little risk of obsolescence for our highest sales velocity items because these products generally turn quickly.

We establish our reserve for inventory obsolescence based on inventory with lower sales velocity and inventory with no sales for the past 12 months, which we believe represent some exposure to inventory obsolescence, with particular emphasis on SKUs with the least sales over the previous 12 months.

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At the end of each fiscal year, we prepare a hindsight analysis by comparing the prior year-end obsolescence reserve balance to (i) current year inventory write-offs and (ii) the value of products with no sales for the past 12 months that remain in inventory.

Based on our hindsight analysis, we concluded that our prior year reserve was within a range of acceptable estimates and that our estimation methodology is appropriate.

Based on our most recent hindsight analysis, we concluded that our prior year reserve was within a range of acceptable estimates and that our estimation methodology is appropriate.

If the balance of our inventory reserve increased or decreased by 20% at December 31, 2022, pretax income would change by approximately $4.2 million and earnings per share would change by approximately $0.08 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2022).

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We continually revise these estimates throughout the year to reflect actual purchase levels and identifiable trends.

As a result, our estimated quarterly vendor program benefits accrual may include cumulative catch-up adjustments to reflect any changes in our estimates between reporting periods.

As a result, our estimated quarterly vendor program benefits accrual may include cumulative catch-up adjustments to reflect any changes in

our estimates between reporting periods.

These adjustments tend to have a greater impact on gross margin in the fourth quarter since it is our seasonally slowest quarter and because the majority of our vendor arrangements are based on calendar year periods.

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In the first quarter of the subsequent year, we prepare a hindsight analysis by comparing actual vendor credits received to the prior year vendor receivable balances.

Based on our hindsight analysis, we concluded that our vendor program estimates were within a range of acceptable estimates and that our estimation methodology is appropriate.

Based on our most recent hindsight analysis, we concluded that our vendor program estimates were within a range of acceptable estimates and that our estimation methodology is appropriate.

If market conditions were to change, vendors may change the terms of some or all of these programs.

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Determining the amount of unrecognized deferred tax liability on these undistributed earnings and cash balances is not practicable due to the complexity of tax laws and regulations and the varying circumstances, tax treatments and timing of any future repatriation.

We determined not to change our indefinite reinvestment assertion in light of U.S.

We operate in 40 states, 1 United States territory and 11 foreign countries.

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Each year, we prepare a return to provision analysis upon filing our income tax returns.

Based on this hindsight analysis, we concluded that our prior year income tax provision was within a range of acceptable estimates and that our provision calculation methodology is appropriate.

Differences between our effective income tax rate and federal and state statutory tax rates are primarily due to changes in valuation allowances recorded for certain of our international subsidiaries with tax losses and excess tax benefits associated with the exercise of deductible nonqualified stock options and the lapse of restrictions on deductible restricted stock awards.

Based on our most recent hindsight analysis, we concluded that our prior year income tax provision was within a range of acceptable estimates and that our provision calculation methodology is appropriate.

Differences between our effective income tax rate and federal and state statutory tax rates are primarily due to excess tax benefits associated with the exercise of deductible nonqualified stock options and the lapse of restrictions on deductible restricted stock awards.

Performance-Based Compensation Accrual

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Management sets the company’s annual bonus objectives at the beginning of the bonus plan year using both historical information and forecasted results of operations for the current plan year.

Management also establishes specific business improvement objectives for both our operating units and corporate employees.

Management also establishes specific business improvement objectives for both our operating units and

corporate employees.

The Compensation Committee approves objectives for annual bonus plans involving executive management.

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Each year, we compare the actual bonus payouts to amounts accrued at the previous year’s end to determine the accuracy of our performance-based compensation estimates.

Based on our hindsight analysis, we concluded that our performance-based compensation accrual balances were within a reasonable range of acceptable estimates and that our estimation methodologies are appropriate.

Business Combinations - Goodwill and Intangible Asset Valuation

In December 2021, we acquired Porpoise Pool & Patio, Inc.

(“Porpoise”) for $788.7 million, net of cash acquired.

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.

We used the acquisition method of accounting for this business combination.

Our financial statements reflect the operations of an acquired business starting from the closing date of the acquisition.

The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition.

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.

The 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 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.

We ran sensitivity analyses on the significant assumptions to evaluate our valuations and determined each to be within a range of acceptable estimates.

Determining the useful lives of intangible assets also requires judgment.

Our Pinch A Penny brand name is expected to have an indefinite life as it corresponds with the period of expected future cash flows of the intangible asset.

We considered the competitive market position, historical results, macroeconomic environment, our operating plans and expected future use of the brand in our network expansion.

Our estimates of the useful lives of definite-lived intangible assets are based on the same criteria and correspond with the expected future cash flows.

The costs of definite-lived intangibles are amortized to expense over their estimated life.

We review the carrying value of goodwill and non-amortizable intangible assets and conduct tests of impairment on an annual basis as described below.

We also test for impairment if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is below its carrying amount.

We test indefinite-lived intangible assets for impairment if events or changes in circumstances indicate that the asset might be impaired.

Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature and involves the use of significant estimates and assumptions.

For additional details, see Note 3 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

While we believe those estimates and assumptions are reasonable, they are inherently uncertain.

Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.

Based on our most recent hindsight analysis, we concluded that our performance-based compensation accrual balances were within a reasonable range of acceptable estimates and that our estimation methodologies are appropriate.

Impairment of Goodwill and Other Indefinite-Lived Intangible Assets

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As of October 1, 2022, we had 249 reporting units with allocated goodwill balances.

The most significant goodwill balance for a reporting unit was $12.1 million and the average goodwill balance was $1.1 million.

As of December 31, 2021, our most significant goodwill balance for a reporting unit was related to our acquisition of Porpoise as discussed above.

The most significant goodwill balance for a reporting unit was our Porpoise reporting unit with $403.5 million of goodwill.

Other than our Porpoise reporting unit, the next most significant goodwill balance for a reporting unit was $12.1 million and the average goodwill balance per reporting unit was $1.2 million.

In October 2022, we performed our annual goodwill impairment test and recorded goodwill impairment of $0.6 million related to the closure of a Horizon reporting unit in that period.

In October 2021 and 2020, we performed our annual goodwill impairment test and did not recognize any goodwill impairment at the reporting unit level.

In the first quarter of 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.

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.

The fair value estimates used in our impairment test is determined using discounted cash flow models, which require the use of significant unobservable inputs, representative of a Level 3 fair value measurement.

To estimate the fair value of our reporting units, we project future cash flows using management’s assumptions for sales growth rates, operating margins and discount

These estimates can significantly affect the outcome of our impairment test.

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To test the reasonableness of our fair value estimates, we compared our aggregate estimated fair values to our market capitalization as of the date of our annual impairment test.

We expect that a reasonable fair value estimate would reflect a moderate acquisition premium.

Our aggregate estimated fair values fell in line with our market capitalization, which we consider to be reasonable for the purpose of our goodwill impairment test.

In 2022, our aggregate estimated fair values were modestly higher than our market capitalization.

To facilitate a sensitivity analysis, we reduced our consolidated fair value estimate to reflect more conservative discounted cash flow assumptions, the sensitivity of a 50 basis point increase in our estimated weighted average cost of capital or a 50 basis point decrease in the estimated perpetuity growth rate.

Our sensitivity analysis generated a fair value estimate below our market capitalization and did not result in the identification of additional at-risk locations.

Our sensitivity analysis resulted in a fair value lower than our market capitalization and did not result in the identification of additional at-risk locations.

Based on our 2022 goodwill impairment analysis, we consider one of our Horizon reporting units in Texas with goodwill of $0.5 million as most at risk for goodwill impairment due to marginal results in recent years.

The most sensitive assumptions related to our fair value for this location relates to future projected operating results and management’s ability to effectively manage costs.

If our assumptions or estimates in our fair value calculations change or if operating results are less than forecasted, we could incur impairment charges in future periods.

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Operating expenses 830,525 779,897 77,104 4,411 907,629 784,308

736,707 656,968 47,601 9,907 784,308 666,875

Expenses as a % of net sales 14.1 % 14.8 % 26.6 % 31.9 % 14.7 % 14.8 %

Operating income (loss) 974,219 833,355 51,564 (571) 1,025,783 832,784

811,113 465,875 21,671 (1,848) 832,784 464,027

Operating margin 16.5 % 15.8 % 17.8 % (4.1) % 16.6 % 15.7 %

(1) Base business and total reflect a $2.5 million note recovery in 2021 and $6.9 million of impairment from goodwill and other assets recorded in 2020.

We have excluded the following acquisitions from base business for the periods identified:

Sales Centers

Tri-State Pool Distributors April 2022 1 May - December 2022

Porpoise Pool & Patio, Inc.

December 2021 1 December 2021

December 2021 1 January - December 2022 and December 2021

Wingate Supply, Inc.

December 2021 1 December 2021

December 2021 1 January - December 2022 and December 2021

Vak Pak Builders Supply, Inc.

June 2021 1 June - December 2021

Pool Source, LLC April 2021 1 April - December 2021

June 2021 1 January - August 2022 and June - August 2021

Pool Source, LLC April 2021 1 January - June 2022 and

April - June 2021

TWC Distributors, Inc.

December 2020 10 January - December 2021 and December 2020

Jet Line Products, Inc.

October 2020 9 January - December 2021 and October - December 2020

Northeastern Swimming Pool Distributors, Inc.

September 2020 2 January - November 2021 and September - November 2020

Master Tile Network LLC February 2020 4 January - May 2021 and February - May 2020

December 2020 10 January - February 2022 and January - February 2021

When calculating our base business results, we exclude sales centers that are acquired, closed or opened in new markets for a period of 15 months.

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December 31, 2021 410

Acquired locations 4

Acquired location 1

New locations 10

Closed/consolidated locations (2)

Closed location (1)

December 31, 2022 420

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Net sales increased 17% compared to 2021, with 12% of this increase resulting from base business sales growth.

Maintenance, refurbishment and construction activity remained strong in 2021 as households continued to create and expand home-based outdoor living spaces.

Our sales were driven by robust customer demand for outdoor living products throughout the year and were aided by inflationary benefits and warmer weather trends across most of the United States.

Our 2022 results were driven by elevated price inflation and sustained demand for outdoor-living products.

Sales growth in our seasonally significant quarters (second and third quarters) were limited by industry capacity, including labor and supply chain constraints and less favorable weather conditions on a year-over-year comparison.

We observed improvements in our supply chain dynamics in 2022 following the challenges that began in the second half of 2021 through early 2022.

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

• strong demand for discretionary products, as evidenced by improvements in sales growth rates for product offerings such as equipment and building materials (see discussion below);

• increased demand for residential swimming pool maintenance supplies due to earlier pool openings and increased usage, as evidenced by improvements in sales growth rates to retail customers (see discussion below);

• market share gains, including those in building materials (see discussion below);

• inflationary product cost increases of approximately 7% to 8% (compared to our historical average of 1% to 2%);

• inflationary product cost increases of approximately 10% (compared to 7% to 8% in 2021);

• 5% sales growth from recent acquisitions

We believe that sales growth rates for certain product offerings, such as equipment and building materials evidence increased spending in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades.

In 2021, sales for equipment, such as swimming pool heaters, pumps, lights and filters, increased 35% compared to 2020, and collectively represented approximately 29% of net sales.

This increase reflects both the growth of replacement activity and continued demand for higher-priced, more energy-efficient products.

• favorable trends for our products including:

◦ consistent demand for discretionary products, as evidenced by higher sales for product offerings such as equipment and building materials (see discussion below);

◦ market share gains, including those in building materials (see discussion below);

◦ sustained demand for residential swimming pool maintenance supplies, as the installed base of pools continues to grow.

Following our robust 33% sales growth (and 26% base business sales growth) in the first quarter of 2022, results through the remainder of the year were limited by several factors.

We estimate that the benefits discussed above were partially offset by the following:

• 1% impact from softness in our European markets, reflecting the impact of the macro-economic environment;

• 1% unfavorable impact from currency exchange rate fluctuations;

• less favorable weather conditions compared to last year, particularly in our seasonal markets (see discussion below).

Higher sales for certain product offerings, such as equipment and building materials, indicate consistent demand in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades.

In 2022, sales of equipment for our base business, which includes swimming pool heaters, pumps, lights, filters and automation, increased approximately 9% compared to 2021 and represented approximately 28% of net sales (or an increase of 17% representing approximately 29% of net sales including our recent acquisition of Porpoise).

Equipment growth for certain products was limited by continued supply chain constraints.

Sales of building materials grew 18% compared to 2021 and represented approximately 13% of net sales in 2022.

Sales to customers who service large commercial installations and specialty retailers that sell swimming pool supplies are included in the appropriate existing product categories, and growth in these areas is reflected in the numbers in the paragraph above.

Sales to retail customers increased 20% compared to 2020 and represented approximately 12% of our net sales in 2021.

Sales to commercial customers increased 24% in 2021, as business and leisure travel improved in 2021 following COVID-19 related closures in 2020 and demand from commercial customers began to return to normalized pre-pandemic levels.

Sales to commercial customers represented approximately 3% of our net sales in 2021.

Sales of chemicals for our base business, representing 11% of total net sales, increased 32% compared to 2021 (or an increase of 57% representing approximately 13% of net sales including the impact of our December 2021 acquisition of Porpoise).

The increase in chemical sales was driven by inflation, improved supply over last year and strong demand for non-discretionary maintenance products.

Sales to specialty retailers that sell swimming pool supplies and customers who service large commercial installations are included in the appropriate existing product categories, and growth in these areas is reflected in the discussion above.

In 2022, sales to base business retail customers increased 9% compared to 2021 and represented approximately 11% of our consolidated net sales.

Sales to certain of our retail customers have been hindered by less favorable weather conditions compared to the prior year.

Including the impact of our December 2021 acquisition of Porpoise, sales to retail customers increased 39% and represented approximately 14% of our net sales.

Sales to commercial customers increased 27% compared to 2021 and represented approximately 4% of our consolidated net sales in 2022.

Net sales in our seasonal markets (not considering Europe), representing 45% of our total base business net sales in 2022, increased 11% compared to 2021.

Comparatively, net sales in our year-round markets, representing 51% of our total base business net sales in 2022, increased 15% compared to 2021.

Net sales in Europe, representing 4% of our total net sales in 2022, declined 5% in local currency.

While we estimate that net sales in Europe benefited 10% from inflationary product cost increases, beginning in the second quarter of 2022, our results were negatively impacted by a decline in the volume of sales driven by macroeconomic uncertainty.

2022 Quarterly Sales Performance Compared to 2021 Quarterly Sales Performance

In each quarter of 2021, sales benefited from continued elevated demand for swimming pool and outdoor living products, driven by home-centric and work-from-home trends.

Households continued to invest in their backyards and outdoor living spaces, resulting in broad sales gains across many product categories and geographies.

• The increase in our sales in the first quarter of 2022 reflected continued strong demand for outdoor living products in addition to elevated price inflation of approximately 10% to 12%.

Sales benefited approximately 5% from both accelerated customer early buys and an extra selling day in the first quarter of 2022 compared to the first quarter of 2021.

• Our results in the second quarter of 2022 were indicative of healthy demand for our products as maintenance, replacement, refurbishment and construction activity remained strong.

Net sales benefited approximately 10% to 11% from elevated price inflation, but were unfavorably impacted 2% from both currency exchange rate fluctuations and customer early buys shifted into the first quarter of 2022.

• Net sales in the third quarter of 2022 benefited approximately 9% to 10% from inflationary product cost increases and were aided by healthy demand for our products and warmer weather in our year-round markets.

We estimate that these increases were partially offset by 1% each from softness in our European markets, unfavorable currency exchange rate fluctuations and one less selling day in Q3 2022 versus Q3 2021.

In the third quarter of 2022, we experienced a net sales shift of $9.0 million from Q3 2022 to Q4 2022 due to closures from Hurricane Ian.

• Net sales benefited approximately 8% from inflationary product cost increases in the fourth quarter of 2022.

Weather conditions, particularly in the month of December when an Arctic blast moved across the U.S., were much less favorable on a year-over-year comparison.

Additionally, net sales were unfavorably impacted 1% from currency exchange rate fluctuations and 1% from softness in our European markets.

First Second Third Fourth

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Gross margin 31.3 % 30.5 %

Gross margin improved 80 basis points to 31.3% in 2022 compared to 30.5% in 2021, reflecting benefits from acquisitions, increased pricing and supply chain management initiatives.

These increases were partially offset by lower incentives earned under our volume-based vendor programs and $13.0 million recorded within Cost of sales in the fourth quarter of 2022 related to increased duties and tariffs for certain imported chemicals.

Given supply chain improvements through the latter half of 2022, we do not expect to import a significant portion of this product in 2023.

Operating Expenses

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Selling and administrative expenses $ 907.6 $ 784.3 $ 123.3 16%

(Recovery) impairment of goodwill and other assets (2.5) 6.9 (9.4) (136)%

Operating expenses as a percentage of net sales 14.7 % 14.8 %

Operating expenses, including a note recovery in 2021 and impairment charges in 2020, increased 18%, or $117.4 million, to $784.3 million in 2021, up from $666.9 million in 2020.

The majority of the increase in our operating expenses is due to higher compensation costs as we reward our employees through performance-based compensation and increase wages to support stronger demand.

Other incremental operating expense increases relate to increases in growth-driven facility and freight costs, in addition to investments in technology.

In the first quarter of 2020, we recorded impairment charges of $6.9 million, which included $2.5 million from a note and a goodwill and intangibles impairment charge of $4.4 million.

In 2021, we recovered the $2.5 million from the previously impaired note.

Operating expenses as a percentage of net sales declined 210 basis points, contributing to the 390 basis point expansion in our operating margin for the year driven by a combination of higher year-over-year sales and improved operating leverage as we utilize our existing network to manage incremental costs for new sales center openings and acquisitions.

Operating expenses increased 16%, or $123.3 million, to $907.6 million in 2022, up from $784.3 million in 2021.

Base business operating expenses rose only 6% compared to 12% base business gross profit growth.

The increase in operating expenses reflects inflationary increases and incremental costs to support our business growth, including recent acquisitions.

Our expense growth reflects increases in growth-driven labor, facility and freight costs, along with increased investments in technology.

Interest and Other Non-operating Expenses, net

Interest and other non-operating expenses, net decreased $3.7 million compared to 2020, primarily due to the impact of foreign currency losses, with a loss of $0.3 million recognized in 2021 compared to a loss of $1.7 million recognized in 2020, in addition to interest income from a note of $1.5 million in 2021.

Interest expense related to borrowings increased approximately $1.2 million, primarily due to higher average interest rates between periods.

Our weighted average effective interest rate increased to 2.5% in 2021 from 2.1% in 2020 on consistent average outstanding debt balances.

Interest and other non-operating expenses, net increased $32.3 million compared to 2021, primarily reflecting higher average debt levels and higher average interest rates.

Our weighted average effective interest rate increased to 2.8% in 2022 from 2.5% in 2021 on average outstanding debt of $1.4 billion in 2022 versus $403.4 million in 2021.

Our weighted average effective interest rate increased to 4.2% in the fourth quarter of 2022, reflecting the impact of rapidly increasing rates in the latter part of 2022.

Our effective income tax rate was 24.0% at December 31, 2022 and 21.1% at December 31, 2021.

We recorded a $30.0 million, or $0.74 per diluted share, benefit from ASU 2016-09 for the year ended December 31, 2021 compared to a benefit of $28.6 million, or $0.70 per diluted share, realized in the same period in 2020.

We recorded a $10.8 million, or $0.27 per diluted share, benefit from ASU 2016-09 for the year ended December 31, 2022 compared to a benefit of $30.0 million, or $0.74 per diluted share, realized in 2021.

Without the benefits from ASU 2016-09, our effective tax rate was 25.1% and 24.7% for the years ended 2022 and 2021, respectively.

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The non-GAAP measures described below should be considered in the context of all of our other disclosures in this Form 10-K.

Adjusted Income Statement Information

We have included adjusted net income and adjusted diluted EPS, which are non-GAAP financial measures, as supplemental disclosures, because we believe these measures are useful to investors and others in assessing our year-over-year operating performance.

Adjusted net income and adjusted diluted EPS are key measures used by management to eliminate the impact of our non-cash and non-recurring charges and to provide investors and others with additional information about our potential future operating performance to supplement GAAP measures.

We believe these measures should be considered in addition to, not as a substitute for, net income and diluted EPS presented in accordance with GAAP.

Other companies may calculate these non-GAAP financial measures differently than we do, which may limit their usefulness as comparative measures.

The table below presents a reconciliation of net income to adjusted net income.

(Unaudited) Year Ended

(in thousands) December 31,

Net income $ 650,624 $ 366,738

(Recovery) impairment of goodwill and other assets (2,500) 6,944

Tax impact on note (1)

Adjusted net income $ 648,754 $ 373,028

(1) Our effective tax rate at March 31, 2020 was a 0.1% benefit.

Without impairment from goodwill and intangibles and tax benefits from ASU 2016-09 recorded in the first quarter of 2020, our effective tax rate for the first quarter of 2020 was 25.4%, which we used to calculate the tax impact related to the $2.5 million note impairment.

Adjusted Diluted EPS

We have included adjusted diluted EPS, a non-GAAP financial measure, as a supplemental disclosure, because we believe this measure is useful to management, investors and others in assessing our year-over-year operating performance.

Adjusted diluted EPS is a key measure used by management to demonstrate the impact of tax benefits from ASU 2016-09 on our diluted EPS and to provide investors and others with additional information about our potential future operating performance to supplement GAAP measures.

We believe this measure should be considered in addition to, not as a substitute for, diluted EPS presented in accordance with GAAP, and in the context of our other disclosures.

Other companies may calculate this non-GAAP financial measure differently than we do, which may limit their usefulness as a comparative measure.

The table below presents a reconciliation of diluted EPS to adjusted diluted EPS.

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ASU 2016-09 tax benefit 0.27 0.74

Adjusted diluted EPS without ASU 2016-09 tax benefit 15.23 8.27

After-tax (recovery) impairment charges (0.05) 0.15

Adjusted diluted EPS without ASU 2016-19 tax benefit and after-tax (recovery) impairment charges $ 15.18 $ 8.42

Adjusted diluted EPS $ 18.43 $ 15.23

Fiscal Year 2021 compared to Fiscal Year 2020

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Weather Impacts on Fiscal Year 2022 to Fiscal Year 2021 Comparisons

Sales in the first quarter of 2021 benefited from generally mild weather conditions throughout the contiguous United States.

In February 2021, Texas experienced the most costly winter storm event on record for the United States, which damaged many swimming pools and added to the existing, strong replacement opportunity in that market.

In contrast, sales in the first quarter of 2020 benefited from much above-average temperatures throughout the United States, particularly in the southern United States.

Overall, varied weather conditions in the second quarter of 2021 favorably impacted our sales growth.

While the southern states saw mild temperatures and above-average precipitation, the western states, particularly California, experienced severely high temperatures and drought.

The average U.S.

temperature in June was the hottest on record in 127 years.

Comparatively, in the second quarter of 2020, we observed generally mild weather conditions with warmer weather throughout the western United States.

Generally favorable weather conditions benefited sales in the third quarter of 2021.

Temperatures ranged from above-average to substantially above-average throughout most of the contiguous United States with September being the fifth warmest on record.

Precipitation was below-average in most of the western half of the United States and normal to above-average in the eastern half.

Likewise, results in the third quarter of 2020 were favorably impacted by above-average temperatures and below-average precipitation.

In the fourth quarter of 2021, sales benefited from above-average temperatures throughout much of the contiguous United States, particularly in the month of December, which was the fifth warmest on record in a 127-year period.

Precipitation levels varied, with the southern states experiencing levels much below average and the northern states seeing above-average levels.

Similarly, sales in the fourth quarter of 2020 benefited from above-average temperatures and below-average precipitation.

Overall, weather conditions in the first quarter of 2022 were less favorable than weather conditions in the first quarter of 2021.

Sales benefited from above-average temperatures along much of the west and the east coast, although Texas experienced cooler-than-normal temperatures.

In addition, some seasonal markets had unfavorable weather compared to the first quarter of 2021 when construction activity started earlier than normal.

Similarly, results in Europe were hindered by unfavorable weather conditions.

In the first quarter of 2021, sales benefited from favorable and generally mild weather conditions throughout the contiguous United States.

In February 2021, Texas experienced the most costly winter storm event on record for the United States, which damaged many swimming pools and added to already strong replacement activity .

We observed unfavorable weather conditions in certain markets throughout the second quarter of 2022.

Heavy rainfall and cooler temperatures throughout the northeastern United States and Canada resulted in slower sales activity and limited sales growth in the second quarter of 2022.

Additionally, results in Europe continued to be impacted by unfavorable weather conditions.

In contrast, our southern markets benefited from above-average temperatures, particularly in Texas.

In the second quarter of 2021, overall weather conditions favorably impacted sales growth with the average U.S.

temperature in June 2021 being the hottest on record in 127 years.

Sales in the third quarter of 2022 were generally aided by above-average temperatures throughout much of the contiguous United States.

However, sales in Florida were negatively impacted by closures due to Hurricane Ian at the end of the quarter, which we believe we recovered in the fourth quarter of 2022.

Compared to last year, weather conditions in Canada and the

northern states were less favorable.

Generally favorable weather conditions benefited sales in the third quarter of 2021 with most of the United States experiencing above-average temperatures and below-average precipitation.

We observed generally unfavorable weather conditions throughout the fourth quarter of 2022, particularly in the month of December when an Arctic front brought freezing temperatures and above-average precipitation across much of the United States.

Conditions were especially impactful in Canada and the Northeast compared to the prior year.

In contrast, sales in the fourth quarter of 2021 benefited from above-average temperatures throughout much of the contiguous United States, including the fifth warmest December on record in a 127-year period.

Weather Impacts on Fiscal Year 2021 to Fiscal Year 2020 Comparisons

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Our capital spending primarily relates to leasehold improvements, delivery and service vehicles and information technology.

We focus our capital expenditure plans on the needs of our sales centers.

Capital expenditures were 0.7% of net sales in 2021, 0.6% of net sales in 2020 and 1.0% of net sales in 2019.

Although our capital spending increased by $16.0 million in 2021, capital expenditures as a percentage of net sales were lower than our historical average of 1.0% of net sales due to our significant sales growth.

Capital expenditures in 2020 were lower than our historical average due to cost-saving measures implemented at the beginning of the COVID-19 pandemic.

We focus our capital expenditure plans based on the needs of our sales centers.

Historically, our capital expenditures have averaged roughly 1.0% of net sales.

Capital expenditures were 0.7% of net sales in 2022 and 2021 and 0.6% of net sales in 2020.

Since 2020, our capital expenditures as a percentage of net sales were lower than our historical average due to our significant sales growth.

Capital expenditures in 2020 were also lower due to cost-saving measures implemented at the beginning of the COVID-19 pandemic.

Based on management’s current plans, we project capital expenditures for 2023 will continue to approximate the historical average of 1% of net sales.

We also plan to increase our investment in technology and automation enabling us to operate more efficiently.

We have initiated a multiyear project to transform our legacy enterprise systems and capabilities to improve customer and team member experiences.

We believe we have adequate availability of capital to fund present operations and the current capacity to finance any working capital needs that may arise.

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We expect to repurchase additional shares in the open market from time to time depending on market conditions.

We plan to fund these repurchases with cash provided by operations and borrowings under the credit and receivables facilities.

We plan to fund these repurchases with cash provided by operations and borrowings under our credit and receivables facilities.

Sources and Uses of Cash

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Financing activities (411,658) 526,131

Cash provided by operations of $313.5 million for 2021 decreased $84.1 million compared to 2020.

The decrease in cash provided by operations is driven by an incremental cash outflow of $371.3 million stemming from changes to our net working capital, primarily reflecting an increase in inventory, partially offset by increases in accounts payable and net income.

Cash used in investing activities increased $703.3 million in 2021 due to an increase of $687.4 million in payments for acquisitions compared to 2020 and a $16.0 million increase in net capital expenditures between years.

Cash provided by financing activities increased $770.5 million to $526.1 million in 2021, compared to cash used in financing activities of $244.4 million in 2020.

The increase in cash provided by financing activities primarily reflects a $865.3 million increase in net debt proceeds, offset by additional share repurchases of $61.8 million and an increase in dividends paid of $27.7 million.

Cash provided by operations of $484.9 million for 2022 increased $171.4 million compared to 2021, primarily driven by an increase in net income and changes in working capital.

Our operating cash flows were also impacted by federal tax payments of $79.5 million in 2022, which were allowed to be deferred and included in accrued expenses and other liabilities at December 31, 2021.

Cash used in investing activities decreased $798.7 million to $50.9 million in 2022, reflecting a decrease of $802.7 million in payments for acquisitions compared to 2021, partially offset by a $6.0 million increase in net capital expenditures between years.

Our higher 2021 investing activities were driven by our purchase of Porpoise Pool & Patio, Inc.

for $788.7 million.

Cash used in financing activities was $411.7 million in 2022 compared to cash provided by financing activities of $526.1 million in 2021.

The change in financing activities primarily reflects a $566.7 million increase in net debt payments, additional share repurchases of $333.2 million and an increase in dividends paid of $31.0 million.

For a discussion of our sources and uses of cash in 2020, see the Liquidity and Capital Resources – Sources and Uses of Cash section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2021 Annual Report on Form 10-K.

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Credit Facility

Our Credit Facility, as amended through December 30, 2021, provides for $1.25 billion in borrowing capacity consisting of a $750.0 million five-year unsecured revolving credit facility and a $500.0 million term loan facility, which includes a $250.0 million delayed-draw term loan facility and an additional $250.0 million incremental term loan facility.

We drew the $250.0 million delayed-draw term loan on December 15, 2021 and used the proceeds to fund our acquisition of Porpoise Pool & Patio, Inc.

Subsequent to December 31, 2021, we drew the $250.0 million incremental term loan on January 4, 2022 and used the same amount to reduce our revolving borrowings.

The term loans 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 the Credit Facility maturity date of September 25, 2026.

The credit facility continues to include a $750.0 million revolving credit facility and sublimits for the issuance of swingline loans and standby letters of credit.

The credit facility includes a $750.0 million revolving credit facility and sublimits for the issuance of swingline loans and standby letters of credit.

The term loans require quarterly amortization payments beginning in September 2023 aggregating to 20% of the original principal amount of the loan during the third, fourth and fifth years of the loan, with all remaining principal due on the Credit Facility maturity date of September 25, 2026.

We intend to continue to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.

At December 31, 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.

At December 31, 2022, there was $1.0 billion outstanding, including a $500.0 million term loan, with a $4.8 million standby letter of credit outstanding and $225.5 million available for borrowing under the Credit Facility.

The weighted average effective interest rate for the Credit Facility as of December 31, 2022 was approximately 4.4%, excluding commitment fees.

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At December 31, 2022, the Term Facility had an outstanding balance of $157.3 million at a weighted average effective interest rate of 5.5%.

Receivables Securitization Facility

Our two-year accounts receivable securitization facility (the Receivables Facility) offers us a lower-cost form of financing.

Under this facility, we can borrow up to $350.0 million between April through August and from $210.0 million to $340.0 million during the remaining months of the year.

The Receivables Facility matures on November 1, 2024.

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.

At December 31, 2022, there was $199.5 million outstanding under the Receivables Facility at a weighted average effective interest rate of 5.2%, excluding commitment fees.

Financial Covenants

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On the last day of each fiscal quarter, our average total leverage ratio must be less than 3.25 to 1.00.

Average Total Leverage Ratio is the ratio of the trailing twelve months (TTM) Average Total Funded Indebtedness plus the TTM Average Accounts Securitization Proceeds divided by the TTM EBITDA (as those terms are defined in the Credit Facility).

As of December 31, 2021, our average total leverage ratio equaled 0.77 (compared to 0.86 as of December 31, 2020) and the TTM average total indebtedness amount used in this calculation was $680.3 million.

Average Total Leverage Ratio is the ratio of the sum of (i) Total Non-Revolving Funded Indebtedness as of such date, (ii) the trailing twelve months (TTM) Average Total Revolving Funded Indebtedness and (iii) the TTM Average Accounts Securitization Proceeds divided by TTM EBITDA (as those terms are defined in the Credit Facility).

As of December 31, 2022, our average total leverage ratio equaled 1.37 (compared to 0.77 as of December 31, 2021) and the TTM average total indebtedness amount used in this calculation was $1.5 billion.

• Minimum Fixed Charge Coverage Ratio .

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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.

Receivables Securitization Facility

Our two-year accounts receivable securitization facility (the Receivables Facility) offers us a lower-cost form of financing.

Under this facility, we can borrow up to $350.0 million between April through June and from $175.0 million to $315.0 million during the remaining months of the year.

The Receivables Facility matures on 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).

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.

Interest Rate Swaps

We utilize interest rate swap contracts and forward-starting interest rate swap contracts to reduce our exposure to fluctuations in variable interest rates for future interest payments on our variable rate borrowings.

Interest expense related to the notional amounts under all swap contracts is based on the fixed rates plus the applicable margin on the respective borrowings.

As of December 31, 2021, we had three interest rate swap contracts in place and two forward-starting interest rate swap contracts, each of which has the effect of converting our exposure to variable interest rates on our variable rate borrowings to fixed interest rates.

Interest expense related to the notional amounts under all swap contracts is based on applicable fixed rates plus the applicable margin on the respective borrowings.

As of December 31, 2022, we had two interest rate swap contracts in place and one forward-starting interest rate swap contract, each of which has the effect of converting our exposure to variable interest rates on a portion of our variable rate borrowings to fixed interest rates.

For more information, see Note 5 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis