What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-27 compared with 2023-02-24 · 163 added, 218 removed, 368 unchanged (51% of the section changed)

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Financial Results

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 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.

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.

Following a period of significant growth over the prior three years, net sales decreased 10% to $5.5 billion in 2023 compared to $6.2 billion in 2022, resulting in a compound annual growth rate (CAGR) of 15% from 2019 to 2023.

Base business results approximated consolidated results for 2023.

Our net sales benefited approximately 3% to 4% from inflationary product cost increases in 2023 versus a benefit of 10% in 2022.

Unfavorable weather conditions in certain markets throughout the first half of the year resulted in a slow start to the swimming pool season and slower maintenance activity than anticipated, limiting sales in the first and second quarters.

Our results were also impacted by lower volumes of discretionary pool products sold due to reduced pool construction activity and discretionary replacement activity.

Gross profit was $1.7 billion in 2023, a 14% decrease from gross profit of $1.9 billion in 2022.

Our gross profit increased at a 16% CAGR from 2019 to 2023.

Gross margin declined 130 basis points to 30.0% in 2023 compared to 31.3% in 2022.

Our 2023 gross margin is in line with our longer-term annual gross margin outlook, while our prior year gross margin benefited from higher levels of inflation and price increases.

Selling and administrative expenses (operating expenses) increased 0.6%, or $5.8 million, to $913.5 million in 2023.

As a percentage of net sales, operating expenses increased 180 basis points to 16.5% in 2023 compared to 14.7% in 2022.

During 2023, volume-driven expenses were managed in line with lower sales, and our largest expense growth drivers related to inflationary wage increases, rent and facility costs and insurance and healthcare-related costs.

Operating income for the year decreased 27% to $746.6 million, down from $1.0 billion in 2022.

Our operating income increased at a 22% CAGR from 2019 to 2023.

Operating margin decreased 310 basis points to 13.5% in 2023 compared to 16.6% in 2022.

Interest and other non-operating expenses, net for the year increased $17.5 million compared to 2022, as higher average interest rates more than offset a decrease in average debt.

We recorded a $6.7 million, or $0.17 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, for the year ended December 31, 2023 compared to a tax benefit of $10.8 million, or $0.27 per diluted share, realized in 2022.

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

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.

Net income declined 30% to $523.2 million in 2023 compared to $748.5 million in 2022.

Earnings per share decreased 29% to $13.35 per diluted share compared to a record of $18.70 per diluted share in 2022.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share decreased 28% to $13.18 per diluted share compared to $18.43 per diluted share in 2022.

From 2019 to 2023, our earnings per diluted share increased by a 20% CAGR and a 23% CAGR without the impact from ASU 2016-19.

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

Financial Position and Liquidity

Cash provided by operations was $484.9 million in 2022.

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

Cash provided by operations was $888.2 million in 2023, which funded the following initiatives:

• a $333.5 million debt reduction

• share repurchases, totaling $306.4 million for the year;

• net working capital outflows of $342.4 million;

• quarterly cash dividend payments to shareholders, totaling $167.5 million for the year;

• net capital expenditures of $43.6 million.

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

• net capital expenditures and acquisitions of $71.6 million.

Total net receivables, including pledged receivables, decreased 2% compared to December 31, 2022, primarily due to lower sales in 2023.

Our allowance for doubtful accounts was $11.7 million at December 31, 2023 and $9.5 million at December 31, 2022.

Our days sales outstanding ratio, as calculated on a trailing four quarters basis, was 26.8 days at December 31, 2023 and 26.9 days at December 31, 2022.

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.

Inventory levels decreased 14% to $1.4 billion, compared to $1.6 billion at December 31, 2022, consistent with our inventory reduction goals and partially offset by increases from early buy vendor deals that we took advantage of in the last quarter of the year.

Our reserve for inventory obsolescence was $23.5 million at December 31, 2023 compared to $21.2 million at December 31, 2022.

Our inventory turns, as calculated on a trailing four quarters basis, were 2.7 times at December 31, 2023 and 2.6 times at December 31, 2022.

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.

Total debt outstanding of $1.1 billion at December 31, 2023 decreased $333.5 million compared to December 31, 2022 as we have used operating cash flows to reduce our debt.

Current Trends and Outlook

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.

In recent years, steady increases in home values, lack of affordable new homes and increased mortgage rates 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.

These outdoor investment trends, which were particularly heightened during 2020 through 2022, resulted in an increase in new pool construction and greater expenditures for maintenance and remodeling products.

In 2023, we estimate that new in-ground pool construction units decreased 23% to approximately 75,000 units from 98,000 units in 2022 as new construction activities declined following significant growth in 2021 and 2020.

Our estimate of the new in-ground pool units added in 2023 is consistent with the 78,000 pools added in 2019.

We expect that consumers will continue to invest in outdoor living spaces as they consider backyards an extension of their home space.

We believe that we are well positioned to benefit from the inherent long-term growth opportunities in our industry fueled by favorable population migration trends, strong housing demand dynamics and product developments and technological advancements as consumers focus on more environmentally sustainable and energy-efficient products.

Market conditions in 2023 were challenged by overall affordability concerns, including higher interest rates and product cost and labor inflation, which led to consumer hesitancy and some cyclical suppression of demand.

While these market conditions impacted new pool construction and remodeling projects, our non-discretionary maintenance product sales in 2023 were not significantly impacted.

In view of current trends, we established our outlook for 2024 based on reasonable expectations for industry demand, pricing and inflationary conditions, focused expense management, increased investment in our digital transformation initiatives and ongoing leverage of existing investments in our business and continuous process improvements.

We also plan to broaden our geographic presence by opening about 10 or more new sales centers in 2024 and by making selective acquisitions when appropriate opportunities arise.

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

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The following summarizes our outlook for 2024:

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

• We expect sales to be flat to a low single digit increase compared to 2023, impacted by the following factors and assumptions:

◦ normal weather patterns for 2024;

◦ 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;

◦ volumes of discretionary products used for swimming pool construction to be flat to down 10%;

◦ volumes of products used in the remodeling, renovation and upgrading of swimming pools to be flat to down 10%;

◦ inflationary product cost increases, which generally pass through to customers of approximately 2% to 3%;

◦ 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 project gross margin for the full year of 2024 to be around 30.0%, with our highest margin in the second quarter of the year.

Our actual gross margin will depend on amounts and timing of inflationary price increases, sales and product mix.

• 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 13.0%.

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

In 2024, we expect our effective tax rate will be approximately 25.3% without the impact of ASU 2016-09.

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

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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;

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

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

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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.

Beginning in the second quarter of 2020 during the COVID-19 pandemic, we experienced unprecedented demand as families spent more time at home and sought opportunities to create or expand home-based outdoor living and entertainment spaces.

This trend had a positive impact on our financial performance during 2020 through 2022.

In the latter half of 2022 and throughout 2023, these trends moderated resulting in a lower number of permits issued for new pools and lagging new pool construction activities.

We expect these trends to continue in 2024.

Our industry also 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.

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

In 2023, our inventory balances normalized with seasonal trends resulting in a 14% decrease compared to 2022.

CRITICAL ACCOUNTING ESTIMATES

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The reserve is intended to reflect the value of inventory at net realizable value.

We provide a reserve of 5% for inventory with lower sales velocity, inventory with no sales for the past 12 months and non-stock inventory as determined at the sales center level.

We also provide an additional 5% reserve for excess lower sales velocity inventory and an additional 45% reserve for excess inventory with no sales for the past 12 months.

We evaluate a potential reserve for 5% for inventory with lower sales velocity, inventory with no sales for the past 12 months and non-stock inventory as determined at the sales center level.

We also consider an additional 5% reserve for excess lower sales velocity inventory and an additional 45% reserve for excess inventory with no sales for the past 12 months.

We determine excess inventory, which is defined as the amount of inventory on hand in excess of the previous 12 months’ usage, on a company-wide basis.

We also evaluate whether the calculated reserve provides sufficient coverage of total inventory with no sales for the past 12 months.

We record reserves as necessary based on our evaluations.

We have not changed our methodology from prior years.

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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.

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.

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

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

We update our estimates for these arrangements at year end to reflect actual annual purchase or sales levels.

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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.

We also utilize our medium-term (three-year) Strategic Plan Incentive Program (SPIP) to provide senior management with an additional cash-based, pay-for-performance award based on the achievement of specified earnings growth objectives.

We have also utilized our medium-term (three-year) Strategic Plan Incentive Program (SPIP) to provide senior management with an additional cash-based, pay-for-performance award based on the achievement of specified earnings growth objectives.

Payouts through the SPIP are based on three-year compound annual growth rates (CAGRs) of our diluted EPS.

Beginning in 2023, our Compensation Committee did not grant any awards under the SPIP.

Outstanding awards will pay out in 2024 and 2025 if the applicable three-year performance conditions are achieved.

We record annual performance-based compensation accruals based on operating income achieved in a quarter as a percentage of total expected operating income for the year.

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We record SPIP accruals based on our total expected EPS for the current fiscal year and earnings growth estimates for the succeeding two years.

We base our current fiscal year estimates on the same assumptions used for our annual bonus calculation and we base our forward-looking estimates on historical growth trends and our projections for the remainder of the three-year performance periods.

Our quarterly performance-based compensation expense and accrual balances may vary relative to actual annual bonus expense and payouts due to the following:

• differences between estimated and actual performance;

• our projections related to achievement of multiple-year performance objectives for our SPIP;

• the discretionary components of the bonus plans.

We base our current fiscal year estimates on the same assumptions used for our annual bonus calculation.

Our quarterly performance-based compensation expense and accrual balances may vary relative to actual annual bonus expense and payouts due to the following differences between estimated and actual performance and the discretionary components of the bonus plans.

We generally make bonus payments at the end of February following the most recently completed fiscal year.

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We perform a goodwill impairment test in the fourth quarter of each year or on a more frequent basis if events or changes in circumstances occur that indicate potential impairment.

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, we define a reporting unit as an individual sales center.

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

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.

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

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

The earnings multiples are then used to estimate the fair value of each reporting unit.

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

We also review for potential impairment indicators at the reporting unit level based on an evaluation of recent historical operating trends, current and projected local market conditions and other relevant factors as appropriate.

To the extent the carrying value of a reporting unit is greater than its estimated fair value, we perform a discounted cash flow analysis at the reporting unit level to further evaluate our initial fair value estimate.

If the carrying value of the reporting unit exceeds the fair value, we record a goodwill impairment charge for the difference, up to the carrying value of the goodwill.

Since we define an operating segment as an individual sales center and we do not have operations below the sales center level, we define a reporting unit as an individual sales center.

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.

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

In 2023, our aggregate estimated fair values were in line with 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 150 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 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.

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

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.

Impairment charges would decrease operating income, negatively impact diluted EPS and result in lower asset values on our balance sheet.

In September 2023, we recorded goodwill impairment of $0.6 million, primarily related to one of our Horizon reporting units in Texas that we previously identified as being most at risk of goodwill impairment.

We had been monitoring this location’s results, which came in below expectations at the end of the 2023 season.

We performed an interim goodwill impairment analysis, which included a discounted cash flow analysis, and determined that the estimated fair value of the reporting unit no longer exceeded its carrying value.

In October 2023, we performed our annual goodwill impairment test and did not record any additional goodwill impairment at the reporting unit level.

As of October 1, 2023, we had 250 reporting units with allocated goodwill balances.

Our most significant goodwill balance of $403.5 million was related to our Porpoise Pool & Patio reporting unit and the next largest goodwill balance for a reporting unit was $12.1 million.

The average goodwill balance per reporting unit was $2.8 million.

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

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

Recent Accounting Pronouncements

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Fiscal Year 2023 compared to Fiscal Year 2022

The following table breaks out our consolidated results into the base business component and the excluded components (sales centers excluded from base business):

(Unaudited) Base Business Excluded Total

(in thousands) Year Ended Year Ended Year Ended

December 31, December 31, December 31,

2022 2021 2022 2021 2022 2021

Net sales $ 5,889,497 $ 5,281,773 $ 290,230 $ 13,811 $ 6,179,727 $ 5,295,584

Gross profit 1,804,744 1,613,252 128,668 3,840 1,933,412 1,617,092

Gross margin 30.6 % 30.5 % 44.3 % 27.8 % 31.3 % 30.5 %

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

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

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

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 January - December 2022 and December 2021

Wingate Supply, Inc.

December 2021 1 January - December 2022 and December 2021

Vak Pak Builders Supply, Inc.

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 - 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.

We also exclude consolidated sales centers when we do not expect to maintain the majority of the existing business and existing sales centers that are consolidated with acquired sales centers.

Base Business

We calculate base business results by excluding, for a period of 15 months, sales centers that we acquire, open in new markets or close.

We also exclude consolidated sales centers when we do not expect to maintain the majority of the existing business and existing sales centers that we consolidate with acquired sales centers.

We generally allocate corporate overhead expenses to excluded sales centers on the basis of their net sales as a percentage of total net sales.

After 15 months of operations, we include acquired, consolidated and new market sales centers in the base business calculation including the comparative prior year period.

After 15 months, we include acquired, consolidated and new market sales centers in the base business calculation including the comparative prior year period.

We have not provided separate base business income statements within this Form 10-K as base business results approximated consolidated results, and acquisitions and sales centers excluded from base business contributed less than 1% to the change in net sales.

The table below summarizes the changes in our sales centers during 2023:

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New locations 14

Closed location (1)

December 31, 2023 439

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Net sales $ 5,541.6 $ 6,179.7 $ (638.1) (10)%

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

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):

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

• 5% sales growth from recent acquisitions

• 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 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.

Following sales growth of 17% in 2022, 35% in 2021 and 23% in 2020 (all compared to the prior year periods), our net sales in 2023 declined 10% compared to 2022.

Our base business results approximated our consolidated results for the year.

At the core of our business, maintenance activities remained stable throughout the year, indicating steady demand for non-discretionary products.

Unfavorable weather conditions in certain markets throughout the first half of the year led to a slow start to the swimming pool season, which limited sales in the first and second quarters.

Our results also reflected lower sales volumes from reduced pool construction activity and discretionary replacement activity as tough macroeconomic conditions strained major project consumer spending.

The following factors also impacted our sales during the year and are listed in order of estimated magnitude.

• Net sales benefited approximately 3% to 4% from inflationary product cost increases (compared to a 10% benefit in 2022), net of price deflation for some products including chemical sanitizers, PVC pipe and rebar.

• We estimate that unfavorable weather conditions, primarily in the first half of the year, negatively impacted sales by approximately 2%.

• Sales were negatively impacted 1% from lower customer early buy activity in 2023 versus 2022.

Related to our product sales, following a period of significant growth over the past three years, we observed a decline in volumes of discretionary products sold, largely due to lagging new pool construction activities.

In 2023, sales of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, decreased approximately 9% compared to 2022 and represented approximately 29% of net sales.

Sales of building materials fell 9% compared to 2022 and represented approximately 13% of net sales in 2023.

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.

In 2023, sales to retail customers decreased 10% compared to 2022 and represented approximately 14% of our consolidated net sales.

Unfavorable weather and supply normalization affected our sales to independent retail customers in the first half of 2023.

Encouragingly, we saw sales trends improve through the last half of the year.

As consumers take advantage of travel opportunities, sales to commercial customers increased 9% compared to 2022 and represented approximately 4% of our consolidated net sales in 2023.

2023 Quarterly Sales Performance Compared to 2022 Quarterly Sales Performance

• 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

Net Sales Growth 33% 15% 14% 6%

Base Business Net Sales Growth 26% 10% 10% 1%

Net Sales Decline (15)% (10)% (9)% (8)%

• In the first quarter of 2023, unfavorable weather in our western markets, offset generally favorable weather in our southern markets.

On an aggregate basis, we estimate that unfavorable weather conditions in the first quarter negatively impacted sales by approximately 5%.

Sales were also negatively impacted 2% from lower customer early buy activity in the first quarter of 2023 and 1% from continued softness in our European markets.

• A slow start to the swimming pool season combined with cautious consumer sentiment led to slower maintenance activity than anticipated, reduced outdoor living construction activity and deferred discretionary replacement activity in the second quarter of 2023.

Sales were also negatively impacted 1% from both unfavorable weather conditions and lower customer early buy activity in the second quarter of 2023.

• During the third quarter of 2023, maintenance activities remained stable, while pool construction-related activities remained weaker as challenging macroeconomic conditions continued to weigh heavily on major project consumer spending.

Our results were also negatively impacted 1% from one less selling day in the third quarter of 2023 versus the third quarter of 2022.

• In the fourth quarter of 2023, maintenance activities and demand for non-discretionary products were stable.

Lower sales during our seasonally slowest time of year were largely attributable to softer spending trends for discretionary products due to reduced pool construction activity and discretionary replacement activity.

In addition to the sales discussion above, see further details of significant weather impacts under the subheading Seasonality and Quarterly Fluctuations below.

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Gross margin 30.0 % 31.3 %

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.

Gross margin decreased 130 basis points to 30.0% in 2023 compared to 31.3% in 2022.

Our prior year gross margin benefited from our strategic inventory buys when we purchased product ahead of vendor price increases.

As our sales benefited from higher inflation, we were able to sell those products at a lower average cost to our sales price.

Our gross margin in 2023 was in line with our long-term expectations.

Throughout the year, our gross margin was impacted by a variety of factors, including a less advantageous product and customer mix and a more competitive pricing environment as a result of slower activity within the outdoor living industry.

Operating Expenses

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Operating expenses increased 0.6%, or $5.8 million, to $913.5 million in 2023, up from $907.6 million in 2022.

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.

During 2023, volume-driven expenses were managed in line with lower sales resulting in a decline in variable and discretionary expenses (including performance-based compensation, temporary and overtime labor) and reduced delivery and vehicle operating costs compared to last year.

Our largest expense growth drivers related to inflationary wage increases, rent and facility costs and insurance and healthcare-related costs, the return of in-person customer-facing retail events and investments in new locations and customer-focused projects.

Interest and Other Non-operating Expenses, net

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.

Interest and other non-operating expenses, net increased $17.5 million compared to 2022, as higher average interest rates more than offset a decrease in average debt.

Our weighted average effective interest rate increased to 5.2% in 2023 from 2.8% in 2022 on average outstanding debt of $1.1 billion in 2023 versus $1.4 billion in 2022.

Our effective income tax rate was 24.0% at December 31, 2023 and December 31, 2022.

We recorded a $6.7 million, or $0.17 per diluted share, benefit from ASU 2016-09 for the year ended December 31, 2023 compared to a benefit of $10.8 million, or $0.27 per diluted share, realized in 2022.

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.

Without the benefits from ASU 2016-09, our effective tax rate was 25.0% for the year ended 2023 and 25.1% for the year ended 2022.

Net Income and Earnings Per Share

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

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

Net income decreased 30% to $523.2 million in 2023 compared to $748.5 million in 2022.

Earnings per share decreased 29% to $13.35 per diluted share compared to $18.70 per diluted share in 2022.

Reconciliation of Non-GAAP Financial Measures

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Weather Impacts on Fiscal Year 2023 to Fiscal Year 2022 Comparisons

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

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

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 conditions varied across the contiguous United States throughout the first quarter of 2023.

Conditions were generally favorable in our southern markets, where sales benefited from warmer weather and below-average precipitation.

In contrast, results were unfavorably impacted by unusually wet and cold weather in the western U.S., particularly in California and Arizona, which are two of our largest markets.

Overall, we estimate that unfavorable weather conditions in the first quarter of 2023 negatively impacted first quarter sales by approximately 5%.

Comparatively, in the first quarter of 2022, overall weather conditions were generally favorable, and sales benefited from above-average temperatures along much of the west and the east coast, although Texas experienced cooler-than-normal temperatures.

Overall, weather conditions unfavorably impacted sales by an estimated $30.0 million in the second quarter of 2023, particularly at the beginning of the second quarter.

The first week of April through Easter weekend was much cooler across the West versus both average temperatures and prior year temperatures.

The last week of April was also significantly cooler than normal from Texas through the mid-Atlantic region, excluding the coastal Southeast.

While the Northeast had warmer than average weather the first few weeks of April, temperatures cooled dramatically through the first week of May and smoke from wildfires in Canada unfavorably impacted sales in early June.

Weather in Florida was more normal and consistent with prior year, while favorable weather conditions compared to the second quarter of 2022 were limited to the Pacific Northwest and Europe.

Similarly, sales growth in the second quarter of 2022 was challenged by unfavorable weather conditions in our seasonal markets and Europe;

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

Weather conditions in the third quarter of 2023 were fairly neutral as hot temperatures across the southern United States were offset by rainy conditions in the Northeast.

Comparatively, sales in the third quarter of 2022 were generally aided by above-average temperatures throughout much of the contiguous United States, although Florida saw a decline in sales due to closures resulting from Hurricane Ian towards the end of the quarter.

Overall, weather conditions were warm in the fourth quarter of 2023 and did not have a major impact on sales.

The month of December marked the warmest temperatures recorded in 129 years, while the months of October and November saw below average rainfall across most of the United States.

Conversely, fourth quarter of 2022 had less favorable conditions.

In December, an Arctic front brought freezing temperatures and above-average temperatures across the United States and Canada.

Weather Impacts on Fiscal Year 2022 to Fiscal Year 2021 Comparisons

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• repayment of debt to maintain an average total target leverage ratio (as defined below) between 1.5 and 2.0;

• repurchases of our common stock under our Board authorized share repurchase program.

• discretionary repurchases of our common stock under our Board authorized share repurchase program.

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

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

In recent years, we have increased our investment in technology and automation enabling us to operate more efficiently and better serve our customers.

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.

Capital expenditures were 1.1% of net sales in 2023 and 0.7% of net sales in 2022 and 2021.

In 2022 and 2021, our capital expenditures as a percentage of net sales were lower than our historical average due to our significant sales growth in those years.

Based on management’s current plans, we project capital expenditures for 2024 will average 1% to 1.5% of net sales.

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

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Financing activities (798,132) (411,658)

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.

Cash provided by operations of $888.2 million for 2023 increased $403.4 million compared to 2022, primarily driven by positive changes in working capital, particularly as we sold through our prior year strategic inventory purchases, partially offset by lower net income.

Cash used in investing activities increased $20.7 million to $71.6 million in 2023, reflecting a $16.5 million increase in net capital expenditures between years and an increase of $2.3 million in payments for acquisitions compared to 2022.

Cash used in financing activities increased to $798.1 million in 2023 compared to $411.7 million in 2022.

The change in financing activities primarily reflects a $537.0 million increase in net debt payments and a $16.8 million increase in dividends paid, partially offset by a decrease in share repurchases of $164.9 million.

For a discussion of our sources and uses of cash in 2021, see the Liquidity and Capital Resources – Sources and Uses of Cash section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2022 Annual Report on Form 10-K.

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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.

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.

Our Credit Facility provides for $1.25 billion in borrowing capacity consisting of a $750.0 million five-year unsecured revolving credit facility and a $500.0 million term loan facility.

The Credit Facility also includes sublimits for the issuance of swingline loans and standby letters of credit.

We pay interest on revolving and term loan borrowings under the Credit Facility at a variable rate based on one-month Term SOFR, plus an applicable margin.

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

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

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

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

At December 31, 2023, there was $740.0 million outstanding, including a $487.5 million term loan, with a $16.0 million standby letter of credit outstanding and $481.5 million available for borrowing under the Credit Facility.

The weighted average effective interest rate for the Credit Facility as of December 31, 2023 was approximately 4.7%, excluding commitment fees and including the impact of our interest rate swaps.

Term Facility

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Proceeds from the Term Facility were used to pay down the Credit Facility in December 2019, adding borrowing capacity for future share repurchases, acquisitions and growth-oriented working capital expansion.

We pay interest on borrowings under the Term Facility at a variable rate based on one month Term SOFR, plus an applicable margin.

The Term Facility is repaid in quarterly 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.

We may prepay amounts outstanding under the Term Facility without penalty other than interest breakage costs.

In June 2023, we made a prepayment on the Term Facility of $45.0 million with $32.4 million applied against the remaining quarterly installments and the remainder applied against the amount due at maturity.

At December 31, 2023, the Term Facility had an outstanding balance of $109.9 million at a weighted average effective interest rate of 6.6%.

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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.

We pay interest on borrowings under the Receivables Facility at a variable rate based on one month Term SOFR, plus an applicable margin.

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).

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Financial Covenants

Financial covenants of the Credit Facility and the Term Facility include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio, which are our most restrictive financial covenants.

Financial covenants of the Credit Facility, Term Facility and Receivables Facility include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio, which are our most restrictive financial covenants.

As of December 31, 2023, the calculations of these two covenants are detailed below:

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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.

We may declare and pay quarterly dividends so long as (i) the amount per share of such dividends is not greater than the most recently publicly announced dividends per share and (ii) our Average Total Leverage Ratio is less than 3.25 to 1.00 both immediately before and after giving pro forma effect to such dividends.

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.

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• Long-term debt amounts represent the future principal payments on our debt as of December 31, 2023.

Our Receivables Facility matures November 1, 2024 and is included in the table above according to its stated maturity date.

On our Consolidated Balance Sheets, we classify the entire outstanding balance of the Receivables Facility as Long-term debt as we intend and have the ability to refinance the obligations on a long-term basis.

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

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We issue inventory purchase orders in the normal course of business, which represent authorizations to purchase that are cancellable by their terms.

We do not consider purchase orders to be firm inventory commitments;

We do not consider our cancellable purchase orders to be firm inventory commitments;

therefore, they are excluded from the table above.

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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