POOL CORP 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 49 Consolidated Statements of Income 51 Consolidated Statements of Comprehensive Income 52 Consolidated Balance Sheets 53 Consolidated Statements of Cash Flows 54 Consolidated Statements of Changes in Stockholders’ Equity 55 Notes to Consolidated Financial Statements 56 48 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Pool Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Pool Corporation (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 27, 2024 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates. 49 Valuation of Goodwill Description of the Matter At December 31, 2023, the Company’s goodwill was $700.1 million, including $403.5 million of goodwill relating to one reporting unit . As discussed in Note 3 of the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. The Company’s goodwill is assigned to reporting units as of the acquisition date. Auditing management’s annual goodwill impairment test for this reporting unit was complex and highly judgmental due to the estimation required to determine the fair value of the reporting unit. In particular, the fair value estimate is sensitive to certain assumptions, such as changes in the weighted average cost of capital, revenue growth rate, operating margin, and terminal growth rate which are affected by expectations about future market or economic conditions. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s goodwill impairment review process, including controls over management’s review of the significant assumptions described above. To test the estimated fair value of the Company’s largest reporting unit, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. We compared the significant assumptions used by management to current industry and economic trends and other relevant factors, such as historical results. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting unit that would result from changes in the assumptions. We also involved a specialist to assist in our evaluation of the valuation methodology applied by the Company and certain significant assumptions used in estimating the fair value of the reporting unit. In addition, we reviewed the comparison of the Company’s fair value of its largest reporting unit and the fair value of all other reporting units to the Company’s market capitalization. /s/ Ernst & Young LLP We have served as the Company’s auditor since 1994. New Orleans, Louisiana February 27, 2024 50 POOL CORPORATION Consolidated Statements of Income (In thousands, except per share data) Year Ended December 31, 2023 2022 2021 Net sales $ 5,541,595 $ 6,179,727 $ 5,295,584 Cost of sales 3,881,551 4,246,315 3,678,492 Gross profit 1,660,044 1,933,412 1,617,092 Selling and administrative expenses 913,477 907,629 784,308 Operating income 746,567 1,025,783 832,784 Interest and other non-operating expenses, net 58,431 40,911 8,639 Income before income taxes and equity in earnings 688,136 984,872 824,145 Provision for income taxes 165,084 236,763 173,812 Equity in earnings of unconsolidated investments, net 177 353 291 Net income $ 523,229 $ 748,462 $ 650,624 Earnings per share attributable to common stockholders: Basic $ 13.45 $ 18.89 $ 16.21 Diluted $ 13.35 $ 18.70 $ 15.97 Weighted average common shares outstanding: Basic 38,704 39,409 39,876 Diluted 38,997 39,806 40,480 Cash dividends declared per common share $ 4.30 $ 3.80 $ 2.98 The accompanying Notes are an integral part of these Consolidated Financial Statements. 51 POOL CORPORATION Consolidated Statements of Comprehensive Income (In thousands) Year Ended December 31, 2023 2022 2021 Net income $ 523,229 $ 748,462 $ 650,624 Other comprehensive income (loss): Foreign currency translation adjustments 6,909 ( 10,028 ) ( 4,663 ) Unrealized (losses) gains on interest rate swaps, net of the change in taxes of $ 2,074 , $( 7,802 ) and $( 3,733 ) ( 6,222 ) 23,407 11,198 Total other comprehensive income 687 13,379 6,535 Comprehensive income $ 523,916 $ 761,841 $ 657,159 The accompanying Notes are an integral part of the Consolidated Financial Statements. 52 POOL CORPORATION Consolidated Balance Sheets (In thousands, except share data) December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 66,540 $ 45,591 Receivables, net 145,723 128,247 Receivables pledged under receivables facility 197,187 223,201 Product inventories, net 1,365,466 1,591,060 Prepaid expenses and other current assets 40,444 30,892 Total current assets 1,815,360 2,018,991 Property and equipment, net 223,929 193,709 Goodwill 700,078 691,993 Other intangible assets, net 298,282 305,450 Equity interest investments 1,305 1,248 Operating lease assets 305,688 269,608 Other assets 83,426 84,438 Total assets $ 3,428,068 $ 3,565,437 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 508,672 $ 406,667 Accrued expenses and other current liabilities 134,676 168,521 Short-term borrowings and current portion of long-term debt 38,203 25,042 Current operating lease liabilities 89,215 75,484 Total current liabilities 770,766 675,714 Deferred income taxes 67,421 58,759 Long-term debt, net 1,015,117 1,361,761 Other long-term liabilities 40,028 35,471 Non-current operating lease liabilities 221,949 198,538 Total liabilities 2,115,281 2,330,243 Stockholders’ equity: Common stock, $ 0.001 par value; 100,000,000 shares authorized; 38,354,829 shares issued and outstanding at December 31, 2023 and 39,069,419 shares issued and outstanding at December 31, 2022 38 39 Additional paid-in capital 606,177 575,776 Retained earnings 699,990 653,484 Accumulated other comprehensive income 6,582 5,895 Total stockholders’ equity 1,312,787 1,235,194 Total liabilities and stockholders’ equity $ 3,428,068 $ 3,565,437 The accompanying Notes are an integral part of these Consolidated Financial Statements. 53 POOL CORPORATION Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2023 2022 2021 Operating activities Net income $ 523,229 $ 748,462 $ 650,624 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 31,585 30,381 28,287 Amortization 8,555 8,644 1,739 Share-based compensation 19,582 14,879 15,187 Provision for doubtful accounts receivable, net of write-offs 2,197 3,580 1,134 Provision for inventory obsolescence, net of write-offs 1,930 5,869 3,798 Provision for deferred income taxes 10,359 15,169 4,650 Gains on sales of property and equipment ( 317 ) ( 527 ) ( 93 ) Equity in earnings of unconsolidated investments, net ( 177 ) ( 353 ) ( 291 ) Net (gains) losses on foreign currency transactions ( 813 ) 48 325 Goodwill impairment 550 605 — Other 200 472 473 Changes in operating assets and liabilities, net of effects of acquisitions: Receivables 10,108 19,685 ( 79,940 ) Product inventories 231,240 ( 263,567 ) ( 525,207 ) Prepaid expenses and other assets 57,840 ( 52,815 ) ( 51,199 ) Accounts payable 96,128 7,597 114,893 Accrued expenses and other liabilities ( 103,967 ) ( 53,275 ) 149,110 Net cash provided by operating activities 888,229 484,854 313,490 Investing activities Acquisition of businesses, net of cash acquired ( 11,533 ) ( 9,264 ) ( 811,956 ) Purchases of property and equipment, net of sale proceeds ( 60,096 ) ( 43,619 ) ( 37,658 ) Other investments, net 32 2,013 — Net cash used in investing activities ( 71,597 ) ( 50,870 ) ( 849,614 ) Financing activities Proceeds from revolving line of credit 1,548,618 1,917,173 1,438,408 Payments on revolving line of credit ( 1,815,829 ) ( 1,970,388 ) ( 974,506 ) Proceeds from term loan under credit facility — 250,000 250,000 Payments on term loan under credit facility ( 12,500 ) — — Proceeds from asset-backed financing 552,500 220,000 495,000 Payments on asset-backed financing ( 560,300 ) ( 205,500 ) ( 430,000 ) Payments on term facility ( 47,313 ) ( 9,250 ) ( 9,250 ) Proceeds from short-term borrowings and current portion of long-term debt 19,998 28,445 9,279 Payments on short-term borrowings and current portion of long-term debt ( 19,338 ) ( 27,675 ) ( 9,377 ) Payments of deferred financing costs ( 52 ) ( 170 ) ( 2,638 ) Payments of deferred and contingent acquisition consideration ( 551 ) ( 1,374 ) ( 362 ) Proceeds from stock issued under share-based compensation plans 10,455 8,934 17,197 Payments of cash dividends ( 167,461 ) ( 150,624 ) ( 119,581 ) Repurchases of common stock ( 306,359 ) ( 471,229 ) ( 138,039 ) Net cash used in financing activities ( 798,132 ) ( 411,658 ) 526,131 Effect of exchange rate changes on cash and cash equivalents 2,449 ( 1,056 ) 186 Change in cash and cash equivalents 20,949 21,270 ( 9,807 ) Cash and cash equivalents at beginning of year 45,591 24,321 34,128 Cash and cash equivalents at end of year $ 66,540 $ 45,591 $ 24,321 The accompanying Notes are an integral part of these Consolidated Financial Statements. 54 POOL CORPORATION Consolidated Statements of Changes in Stockholders’ Equity (In thousands) Common Stock Additional Paid-In Retained Accumulated Other Comprehensive Shares Amount Capital Earnings (Loss) Income Total Balance at December 31, 2020 40,232 40 519,579 133,870 ( 14,019 ) 639,470 Net income — — — 650,624 — 650,624 Foreign currency translation — — — — ( 4,663 ) ( 4,663 ) Interest rate swaps, net of the change in taxes of $( 3,733 ) — — — — 11,198 11,198 Repurchases of common stock, net of retirements ( 360 ) — — ( 138,039 ) — ( 138,039 ) Share-based compensation — — 15,187 — — 15,187 Issuance of stock under share-based compensation plans 321 — 17,197 — — 17,197 Declaration of cash dividends — — — ( 119,581 ) — ( 119,581 ) Balance at December 31, 2021 40,193 40 551,963 526,874 ( 7,484 ) 1,071,393 Net income — — — 748,462 — 748,462 Foreign currency translation — — — — ( 10,028 ) ( 10,028 ) Interest rate swaps, net of the change in taxes of $( 7,802 ) — — — — 23,407 23,407 Repurchases of common stock, net of retirements ( 1,234 ) ( 1 ) — ( 471,228 ) — ( 471,229 ) Share-based compensation — — 14,879 — — 14,879 Issuance of stock under share-based compensation plans 110 — 8,934 — — 8,934 Declaration of cash dividends — — — ( 150,624 ) — ( 150,624 ) Balance at December 31, 2022 39,069 39 575,776 653,484 5,895 1,235,194 Net income — — — 523,229 — 523,229 Foreign currency translation — — — — 6,909 6,909 Interest rate swaps, net of the change in taxes of $ 2,074 — — — — ( 6,222 ) ( 6,222 ) Repurchases of common stock, net of retirements ( 862 ) ( 1 ) — ( 309,262 ) — ( 309,263 ) Share-based compensation — — 19,582 — — 19,582 Issuance of stock under share-based compensation plans 148 — 10,819 — — 10,819 Declaration of cash dividends — — — ( 167,461 ) — ( 167,461 ) Balance at December 31, 2023 38,355 $ 38 $ 606,177 $ 699,990 $ 6,582 $ 1,312,787 The accompanying Notes are an integral part of these Consolidated Financial Statements. 55 POOL CORPORATION Notes to Consolidated Financial Statements Note 1 - Organization and Summary of Significant Accounting Policies Description of Business As of December 31, 2023, Pool Corporation and our subsidiaries (the Company , which may also be referred to as we, us or our ) operated 439 sales centers in North America, Europe and Australia from which we sell swimming pool supplies, equipment and related leisure products, irrigation and landscape maintenance products and hardscape, tile and stone products to pool builders, retail stores, service companies, landscape contractors and others. We distribute products through five networks: SCP Distributors (SCP), Superior Pool Products (Superior), Horizon Distributors (Horizon), National Pool Tile (NPT) and Sun Wholesale Supply (Sun Wholesale). Basis of Presentation and Principles of Consolidation We prepared the Consolidated Financial Statements following U.S. generally accepted accounting principles (GAAP) and the requirements of the Securities and Exchange Commission (SEC). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. The Consolidated Financial Statements include the accounts of Pool Corporation and our subsidiaries. All of our subsidiaries are wholly owned. All significant intercompany accounts and intercompany transactions have been eliminated. Use of Estimates To prepare financial statements that conform to GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Our most significant estimates relate to the allowance for doubtful accounts, inventory obsolescence reserves, vendor programs, income taxes, performance-based compensation accruals and goodwill impairment evaluations. We continually review our estimates and make adjustments as necessary, but actual results could be significantly different from what we expected when we made these estimates. Newly Adopted Accounting Pronouncements On June 30, 2023, we adopted Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and all related amendments, which are codified into Accounting Standards Codification (ASC) 848 . This standard provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships and sale or transfer of debt securities classified as held-to-maturity. Prior to our debt amendments in June 2023, discussed further in Note 5, we adopted the hedge accounting expedient related to the probability of forecasted transactions to assert probability of the hedged interest regardless of any expected modification related to reference rate reform. The adoption of this standard did not have a material impact on our consolidated financial statements or related disclosures, and we do not expect a material impact in future periods . Segment Reporting Since all of our sales centers have similar operations and share similar economic characteristics, we aggregate our sales centers into a single reportable segment. These similarities include (i) the nature of our products and services, (ii) the types of customers we sell to and (iii) the distribution methods we use. Our chief operating decision maker (CODM) evaluates each sales center based on individual performance that includes both financial and operational measures. These measures include operating income growth and accounts receivable and inventory management criteria. Each sales center manager and eligible field employee earns performance-based compensation based on these measures developed at the sales center level. A bottom-up approach is used to develop the operating budget for each individual sales center. The CODM approves the budget and routinely monitors budget to actual results for each sales center. Additionally, our CODM makes resource allocation decisions primarily on a sales center-by-sales center basis. No single sales center meets any of the quantitative thresholds (10% of revenues, profit or assets) for separately reporting information about an operating segment. We do not track sales by product lines and product categories on a consolidated basis. We lack readily available financial information due to the number of our product lines and product categories and the fact that we make ongoing changes to product classifications within these groups, thus making it impracticable to report our sales by product category. 56 Seasonality and Weather Our business is seasonal, and weather is one of the principal external factors affecting our business. In general, sales and net income are highest during the second and third quarters, which represent the peak months of swimming pool use, pool and irrigation installation and remodeling and repair activities. Sales are lower during the first and fourth quarters. Revenue Recognition We recognize a sale when a customer obtains control of the product, and we record the amount that reflects the consideration we expect to receive in exchange for such product. We recognize a sale when a customer picks up product at any sales center, when we deliver product to their premises or job sites via our trucks or when we present the product to a third-party carrier. For bill and hold sales, we determine when the customer obtains control of the product on a case-by-case basis to determine the amount of revenue to recognize each period. We consider our distribution of products to represent one reportable revenue stream. Our products are similar in nature, and our revenue recognition policy is the same across our distribution networks. Our customers share similar characteristics and purchase products across all categories. We recognize revenue when our customers take control of our products. We include shipping and handling fees billed to customers as freight out income within net sales. We measure revenue as the amount of consideration we expect to receive in exchange for transferring our products. Consideration may vary due to volume incentives and expected customer returns. We offer volume incentives to some of our customers and account for these incentives as a reduction of sales. We estimate the amount of volume incentives earned based on our estimate of cumulative sales for the fiscal year relative to our customers’ progress toward achieving minimum purchase requirements. We record customer returns, including those associated with customer early buy programs, as a reduction of sales. Based on available information related to our customers’ returns, we record an allowance for estimated returns, which historically has not been material. We regularly review our marketing programs, coupons and customary business practices to determine if any variable consideration exists. Other items that we record as reductions to sales include cash discounts, pricing adjustments and credit card fees related to customer payments. The majority of our sales transactions do not contain additional performance obligations after delivery; therefore, we do not have multiple performance obligations for which to allocate the transaction price. We recognize shipping and handling costs associated with outbound freight in selling and administrative expenses. We report sales net of tax amounts that we collect from our customers and remit to governmental authorities. These tax amounts may include, but are not limited to, sales, use, value-added and some excise taxes. Vendor Programs Many of our arrangements with our vendors provide for us to receive specified amounts of consideration when we achieve any of a number of measures. These measures are generally related to the volume level of purchases from our vendors, or our net cost of products sold, and may include negotiated pricing arrangements. We account for vendor programs as a reduction of the prices of the vendors’ products and as a reduction of inventory until we sell the products, at which time such considerations are recognized as a reduction of Cost of sales on our Consolidated Statements of Income. Throughout the year, we estimate the amount earned based on our expectation of total purchases for the fiscal year relative to the purchase levels that mark our progress toward earning each program. We accrue vendor benefits on a monthly basis using these estimates, provided that we determine they are probable and reasonably estimable. We continually revise these estimates to reflect actual credits earned based on actual purchase levels and trends related to sales and purchasing mix. When we make adjustments to our estimates, we determine whether any portion of the adjustment impacts the amount of vendor credits that are deferred in inventory. We recognize changes in our estimates as a cumulative catch-up adjustment to the amounts recognized to date in our Consolidated Financial Statements. 57 Shipping and Handling Costs We record shipping and handling costs associated with inbound freight as cost of sales. The table below presents shipping and handling costs associated with outbound freight, which we include in selling and administrative expenses (in thousands): 2023 2022 2021 $ 84,932 $ 89,002 $ 75,411 Share-Based Compensation We record share-based compensation for stock options and other share-based awards based on the estimated fair value as measured on the grant date. For stock option awards, we use a Black-Scholes model for estimating the grant date fair value. For additional discussion of share-based compensation, see Note 6. Advertising Costs We expense advertising costs when incurred. The table below presents advertising expense for the past three years (in thousands): 2023 2022 2021 $ 28,532 $ 28,778 $ 9,409 The increase in advertising costs from 2021 to 2022 is driven by our December 2021 acquisition of Porpoise Pool & Patio, Inc., and primarily relates to an advertising fund based on a percentage of Pinch A Penny franchisee sales. Income Taxes We reduce federal and state income taxes payable by the tax benefits associated with the exercise of nonqualified stock options and the lapse of restrictions on restricted stock awards. To the extent realized tax deductions exceed the amount of previously recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. We record all excess tax benefits as a component of income tax benefit or expense in the income statement in the period in which stock options are exercised or restrictions on stock awards lapse. We record Global Intangible Low Tax Income (GILTI) on foreign earnings as period costs if and when incurred, although we have not realized any impacts since the U.S. first imposed taxes on GILTI in December 2017. For additional information regarding income taxes, see Note 7. Equity Method Investments We account for our 50 % investment in Northpark Corporate Center, LLC (NCC) using the equity method of accounting. Accordingly, we report our share of income or loss based on our ownership interest in this investment. Earnings Per Share We calculate basic and diluted earnings per share using the two-class method. Earnings per share under the two-class method is calculated using net income attributable to common stockholders, which is net income reduced by earnings allocated to participating securities. Our participating securities include share-based payment awards that contain a non-forfeitable right to receive dividends and are considered to participate in undistributed earnings with common shareholders. Diluted EPS reflects the dilutive effects of potentially dilutive securities, which include in-the-money outstanding stock options and shares to be purchased under our employee stock purchase plan. Using the treasury stock method, the effect of dilutive securities includes these additional shares of common stock that would have been outstanding based on the assumption that these potentially dilutive securities had been issued. For additional discussion of earnings per share, see Note 8. 58 Foreign Currency The functional currency of each of our foreign subsidiaries is its applicable local currency. We translate our foreign subsidiary financial statements into U.S. dollars based on published exchange rates. We include these translation adjustments as a component of Accumulated other comprehensive income on the Consolidated Balance Sheets. We include realized transaction gains and losses that arise from exchange rate fluctuations in Interest and other non-operating expenses, net on the Consolidated Statements of Income. We realized a net foreign currency transaction gain of $ 0.8 million in 2023 and losses of $ 0.1 million in 2022 and $ 0.3 million in 2021. Fair Value Measurements Recurring Fair Value Measurements Our assets and liabilities that are measured at fair value on a recurring basis include the unrealized gains or losses on our interest rate swap contracts, our deferred compensation plan asset and liability and contingent consideration related to recent acquisitions. The three levels of the fair value hierarchy under the accounting guidance are described below: Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 Inputs to the valuation methodology include: • quoted prices for similar assets or liabilities in active markets; • quoted prices for identical or similar assets or liabilities in inactive markets; • inputs other than quoted prices that are observable for the asset or liability; or • inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The table below presents our assets and liabilities measured and recorded at fair value on a recurring basis (in thousands): Fair Value at December 31, Input Level Classification 2023 2022 Assets Unrealized gains on interest rate swaps Level 2 Other assets $ 25,752 $ 34,049 Deferred compensation plan asset Level 1 Other assets 15,347 13,148 Liabilities Contingent consideration liabilities Level 3 Accrued expenses and other current liabilities $ — $ 554 Deferred compensation plan liability Level 1 Other long-term liabilities 15,347 13,148 We use significant other observable market data or assumptions (Level 2 inputs) in determining the fair value of our interest rate swaps and forward-starting interest rate swap contracts that we believe market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk. Our fair value estimates reflect an income approach based on the terms of the interest rate swap contracts and inputs corroborated by observable market data including interest rate curves. Our deferred compensation plan asset represents investments in securities (primarily mutual funds) traded in an active market (Level 1 inputs) held for the benefit of certain employees as part our deferred compensation plan. We record an equal and offsetting deferred compensation plan liability, which represents our obligation to participating employees. Changes in the fair value of the plan asset and liability are reflected in Selling and administrative expenses in the Consolidated Statements of Income. For additional discussion of our nonqualified deferred compensation plan, see Note 11. The carrying values of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments. The carrying value of long-term debt approximates fair value. Our determination of the estimated fair value reflects a discounted cash flow model using our estimates, including assumptions related to borrowing rates (Level 3 inputs). 59 Nonrecurring Fair Value Measurements In addition to our assets and liabilities that we measure at fair value on a recurring basis, our assets and liabilities are also subject to nonrecurring fair value measurements. Generally, our assets are recorded at fair value on a nonrecurring basis as a result of impairment charges or business combinations. For additional discussion of goodwill and intangible assets and impairment, see Note 3. Derivatives and Hedging Activities At inception, we formally designate and document our interest rate swap contracts that qualify for hedge accounting as cash flow hedges of interest payments on variable rate borrowings. We formally assess, both at inception and at least quarterly, whether the financial instruments used in hedging transactions are effective at offsetting changes in cash flows of the related underlying exposure. To the extent our derivatives are effective in offsetting the variability of the hedged cash flows, we record the changes in the estimated fair value of our interest rate swap contracts to Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. Our interest rate swap contracts and forward-starting interest rate swap contracts are subject to master netting arrangements. According to our accounting policy, we do not offset the fair values of assets with the fair values of liabilities related to these contracts. We recognize any differences between the variable interest rate in effect and the fixed interest rate per our swap contracts as an adjustment to interest expense over the life of the swaps. For our interest rate swap contracts currently in effect, a portion of the change in the estimated fair value between periods relates to future interest expense. Recognition of the change in fair value between periods attributable to accrued interest is reclassified from Accumulated other comprehensive income (loss) to Interest and other non-operating expenses, net on the Consolidated Statements of Income. These amounts were not material in any period presented. For additional discussion of our interest rate swaps, see Note 5. Cash Equivalents We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Credit Risk and Allowance for Doubtful Accounts We record trade receivables at the invoiced amounts less an allowance for doubtful accounts for estimated losses we may incur if customers do not pay. We perform periodic credit evaluations of our customers and we typically do not require collateral. Consistent with industry practices, we generally require payment from our North American customers within 30 days, except for sales under early buy programs for which we provide extended payment terms to qualified customers. Management estimates future losses based on historical bad debts, customer receivable balances, age of customer receivable balances, customers’ financial conditions and current and forecasted economic trends, including certain trends in the housing market, the availability of consumer credit and general economic conditions (as commonly measured by Gross Domestic Product or GDP). We monitor housing market trends through review of the House Price Index as published by the Federal Housing Finance Agency, which measures the movement of single-family house prices. At the end of each quarter, we perform a reserve analysis of all accounts with balances greater than $ 20,000 that are more than 60 days past due. During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. These write-offs are charged against our allowance for doubtful accounts. The following table summarizes the changes in our allowance for doubtful accounts for the past three years (in thousands): 2023 2022 2021 Balance at beginning of year $ 9,522 $ 5,942 $ 4,808 Bad debt expense 7,526 7,449 3,377 Write-offs, net of recoveries ( 5,330 ) ( 3,869 ) ( 2,243 ) Balance at end of year $ 11,718 $ 9,522 $ 5,942 60 Product Inventories and Reserve for Inventory Obsolescence Product inventories consist primarily of goods we purchase from manufacturers to sell to our customers. We record inventory at the lower of cost, using the moving average cost method, or net realizable value. We establish our reserve for inventory obsolescence based on inventory turns by class with particular emphasis on stock keeping units with the weakest sales over the expected sellable period, which is the previous 12 months for most products. The reserve is intended to reflect the net realizable value of inventory that we may not be able to sell at a profit. In evaluating the adequacy of our reserve for inventory obsolescence, we consider a combination of factors including: • the level of inventory in relation to historical sales by product, including inventory usage by classification based on product sales at both the sales center and on a company-wide basis; • changes in customer preferences or regulatory requirements; • seasonal fluctuations in inventory levels; • geographic location; and • superseded products and new product offerings. We periodically adjust our reserve for inventory obsolescence as changes occur in the above-identified factors. The following table summarizes the changes in our reserve for inventory obsolescence for the past three years (in thousands): 2023 2022 2021 Balance at beginning of year $ 21,208 $ 15,196 $ 11,398 Provision for inventory write-downs 8,483 11,989 7,781 Deduction for inventory write-offs ( 6,227 ) ( 5,977 ) ( 3,983 ) Balance at end of year $ 23,464 $ 21,208 $ 15,196 Property and Equipment Property and equipment are stated at cost. We depreciate property and equipment on a straight-line basis over the following estimated useful lives: Buildings 40 years Leasehold improvements (1) 1 - 10 years Autos and trucks 3 - 6 years Machinery and equipment 3 - 15 years Computer equipment 3 - 7 years Furniture and fixtures 5 - 10 years (1) For substantial improvements made near the end of a lease term where we are reasonably certain the lease will be renewed, we amortize the leasehold improvement over the remaining life of the lease including the expected renewal period. The table below presents depreciation expense for the past three years (in thousands): 2023 2022 2021 $ 31,585 $ 30,381 $ 28,287 Acquisitions We use the acquisition method of accounting and recognize assets acquired and liabilities assumed at fair value as of the acquisition date. Any contingent assets acquired and contingent liabilities assumed are also recognized at fair value if we can reasonably estimate fair value during the measurement period (which cannot exceed one year from the acquisition date). We re-measure any contingent liabilities at fair value in each subsequent reporting period. We expense all acquisition-related costs as incurred, including any restructuring costs associated with a business combination. 61 Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is often required in estimating the fair value of assets acquired, particularly intangible assets. Our fair value estimates are based on available historical information and on expectations and assumptions about the future, considering the perspective of market participants. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the underlying estimates and assumptions. If our initial acquisition accounting is incomplete by the end of the reporting period in which a business combination occurs, we report provisional amounts for incomplete items. Once we obtain information required to finalize the accounting for incomplete items, we adjust the provisional amounts recognized. We make adjustments to these provisional amounts during the measurement period. For all acquisitions, we include the results of operations in our Consolidated Financial Statements as of the acquisition date. For additional discussion of acquisitions, see Note 2. Goodwill and Other Intangible Assets Goodwill represents the excess of the amount we paid to acquire a company over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. We test goodwill and other indefinite-lived intangible assets for impairment annually as of October 1st and at any other time when impairment indicators exist. To estimate the fair value of our reporting units, we project 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 assumptions are considered unobservable inputs (Level 3 inputs as defined in the accounting guidance). To the extent the carrying value of a reporting unit is greater than its estimated fair value, we 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. We recognize any impairment loss in operating income. Since we define an operating segment as an individual sales center and we do not have operations below the sales center level, our reporting unit is an individual sales center. For additional discussion of goodwill and other intangible assets, see Note 3. Receivables Securitization Facility Our accounts receivable securitization facility (the Receivables Facility) provides for the sale of certain of our receivables to a wholly owned subsidiary (the Securitization Subsidiary). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities. We account for the sale of the receivable interests as a secured borrowing on our Consolidated Balance Sheets. The receivables subject to the agreement collateralize the cash proceeds received from the third-party financial institutions. We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis. We present the receivables that collateralize the cash proceeds separately as Receivables pledged under receivables facility on our Consolidated Balance Sheets. For additional discussion of the Receivables Facility, see Note 5. Self-Insurance We are self-insured for employee health benefits, workers’ compensation coverage, property and casualty, and automobile insurance. To limit our exposure, we also maintain excess and aggregate liability coverage. We establish self-insurance reserves based on estimates of claims incurred but not reported and information that we obtain from third-party service providers regarding known claims. Our management reviews these reserves based on consideration of various factors, including but not limited to the age of existing claims, estimated settlement amounts and other historical claims data. 62 Accumulated Other Comprehensive Income The table below presents the components of our Accumulated other comprehensive income balance (in thousands): December 31, 2023 2022 Foreign currency translation adjustments $ ( 12,699 ) $ ( 19,608 ) Unrealized gains on interest rate swaps, net of tax 19,281 25,503 Accumulated other comprehensive income $ 6,582 $ 5,895 Retained Earnings We account for the retirement of share repurchases as a decrease to our Retained earnings on our Consolidated Balance Sheets. As of December 31, 2023, the retained earnings reflects cumulative net income, the cumulative impact of adjustments for changes in accounting pronouncements, treasury share retirements since the inception of our share repurchase programs of $ 2.4 billion and cumulative dividends of $ 1.1 billion. Supplemental Cash Flow Information The following table presents supplemental disclosures to the accompanying Consolidated Statements of Cash Flows (in thousands): Year Ended December 31, 2023 2022 2021 Cash paid during the year for: Interest $ 58,131 $ 39,759 $ 10,023 Income taxes, net of refunds 153,157 314,714 83,953 63 Recent Accounting Pronouncements Pending Adoption The following table summarizes the remaining recent accounting pronouncements that we plan to adopt in future periods: Standard Description Effective Date Effect on Financial Statements and Other Significant Matters ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures In December 2023, the FASB issued ASU 2023-09, Income Taxes- Improvements to Income Tax Disclosures , which will require enhancements and further transparency for decision usefulness to various income tax disclosures, most notably the tax rate reconciliation and income taxes paid. Annual periods beginning after December 15, 2024 on a prospective basis and retrospective application is permitted. Early adoption is also permitted. We are currently evaluating the effect this standard will have on our disclosures. ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures, which intends to improve reportable segment disclosures through requirement of enhanced disclosures about significant segment expenses, enhanced interim disclosure requirements, refines situations in which an entity can disclose multiple segment measures of profit or loss, provides advanced segment disclosure requirements for entities with a single reportable segment, as well as other disclosure requirements. Annual periods beginning after December 15, 2023 on a retrospective basis. Early adoption is permitted. We are currently evaluating the effect this standard will have on our disclosures. ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative In October 2023, the FASB issued ASU 2023-06, D isclosure Agreements - Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative , which will impact various disclosure areas, including the statement of cash flows, accounting changes and error corrections, earnings per share, debt, equity, derivatives, and transfers of financial assets. The amendments in ASU 2023-06 will be effective on the date the related disclosures are removed from Regulation S-X or Regulation S-K by the SEC and will no longer be effective if the SEC has not removed the applicable disclosure requirement by June 30, 2027. Early adoption is prohibited. We are currently evaluating the effect this standard will have on our disclosures. Note 2 - Acquisitions 2023 Acquisitions In December 2023, we acquired the distribution assets of A.C. Solucoes para Piscinas, Lda., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in Braga, Portugal. In June 2023, we acquired the distribution assets of Pioneer Pool Products, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in Alabama. In May 2023, we acquired the distribution assets of Recreation Supply Company, a wholesale distributor of commercial swimming pool products, adding one location in North Dakota. In March 2023, we acquired the distribution assets of Pro-Water Irrigation & Landscape Supply, Inc., a wholesale distributor of irrigation and landscape supply products, adding two locations in Arizona. 2022 Acquisitions In April 2022, we acquired the distribution assets of Tri-State Pool Distributors, a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in West Virginia. 64 2021 Acquisitions We acquired Porpoise Pool & Patio, Inc. (Porpoise) on December 16, 2021 for $ 788.7 million, net of cash acquired. We recognized goodwill of $ 403.5 million, other intangible assets of $ 301.0 million and tangible assets of $ 84.2 million, which included $ 57.4 million of acquired land and buildings. The acquisition was funded with borrowings on our Credit Facility. Porpoise’s primary operations consist of Sun Wholesale Supply, a wholesale distributor of swimming pool and outdoor-living products, adding one distribution location in Florida. It also services Pinch A Penny, Inc., a franchisor of independently owned and operated pool and outdoor living-related specialty retail stores. In December 2021, we acquired the distribution assets of Wingate Supply, Inc., a wholesale distributor of irrigation and landscape maintenance products, adding one location in Florida. In June 2021, we acquired the distribution assets of Vak Pak Builders Supply, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in Florida. In April 2021, we acquired Pool Source, LLC, a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in Tennessee. We have completed our acquisition accounting for all acquisitions discussed above, subject to adjustments for standard holdback provisions per the terms of the purchase agreements, which are not material. Note 3 - Goodwill and Other Intangible Assets The table below presents changes in the carrying amount of goodwill and our accumulated impairment losses (in thousands): Goodwill (gross) at December 31, 2021 $ 701,753 Acquired goodwill 5,500 Foreign currency translation and other adjustments ( 1,266 ) Goodwill (gross) at December 31, 2022 705,987 Accumulated impairment losses at December 31, 2021 ( 13,389 ) Goodwill impairment ( 605 ) Accumulated impairment losses at December 31, 2022 ( 13,994 ) Goodwill (net) at December 31, 2022 $ 691,993 Goodwill (gross) at December 31, 2022 $ 705,987 Acquired goodwill 8,137 Foreign currency translation and other adjustments 498 Goodwill (gross) at December 31, 2023 714,622 Accumulated impairment losses at December 31, 2022 ( 13,994 ) Goodwill impairment ( 550 ) Accumulated impairment losses at December 31, 2023 ( 14,544 ) Goodwill (net) at December 31, 2023 $ 700,078 The determination of our reporting units’ goodwill and intangibles fair values includes numerous assumptions that are subject to various risks and uncertainties. The principal assumptions, all of which are considered Level 3 inputs, used in our cash flow analyses consisted of changes in market conditions, forecasted future operating results (including sales growth rates and operating margins) and discount rates (including our weighted-average cost of capital). 65 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. We record goodwill and intangibles impairment in Selling and administrative expenses on our Consolidated Statements of Income. Other intangible assets consisted of the following (in thousands): December 31, Weighted Average Useful Life 2023 2022 Intangibles Gross Accumulated Amortization Intangibles Net Intangibles Gross Accumulated Amortization Intangibles Net Horizon tradename $ 8,400 $ — $ 8,400 $ 8,400 $ — $ 8,400 Indefinite Pinch A Penny brand name 169,000 — 169,000 169,000 — 169,000 Indefinite National Pool Tile (NPT) tradename 1,500 ( 1,187 ) 313 1,500 ( 1,112 ) 388 20 Non-compete agreements 6,206 ( 3,258 ) 2,948 6,022 ( 2,533 ) 3,489 4.64 Customer relationships 109,000 ( 11,125 ) 97,875 109,000 ( 5,677 ) 103,323 20 Franchise agreements 22,000 ( 2,254 ) 19,746 22,000 ( 1,150 ) 20,850 20 Total other intangibles $ 316,106 $ ( 17,824 ) $ 298,282 $ 315,922 $ ( 10,472 ) $ 305,450 The Horizon tradename and Pinch A Penny brand name each have an indefinite useful life and are not subject to amortization. We evaluate the useful life of these intangible assets and test for impairment annually. The NPT tradename, our non-compete agreements, customer relationships and franchise agreements have finite useful lives, and we amortize the estimated fair value of these agreements using the straight-line method over their respective useful lives. We have not identified any indicators of impairment related to these assets. The useful lives for our non-compete agreements are based on their contractual terms. Other intangible amortization expense was $ 7.8 million in 2023, $ 7.8 million in 2022 and $ 1.3 million in 2021. The table below presents estimated amortization expense for other intangible assets for the next five years (in thousands): 2024 $ 7,794 2025 7,676 2026 7,143 2027 6,790 2028 6,619 66 Note 4 - Details of Certain Balance Sheet Accounts The table below presents additional information regarding certain balance sheet accounts (in thousands): December 31, 2023 2022 Receivables, net: Trade accounts $ 60,966 $ 32,793 Vendor programs 92,072 101,554 Other, net 4,403 3,422 Total receivables 157,441 137,769 Less: Allowance for doubtful accounts ( 11,718 ) ( 9,522 ) Receivables, net $ 145,723 $ 128,247 Prepaid expenses and other current assets: Prepaid expenses $ 31,175 $ 24,394 Other current assets 9,269 6,498 Prepaid expenses and other current assets $ 40,444 $ 30,892 Property and equipment, net: Land $ 24,077 $ 19,865 Buildings 56,181 55,911 Leasehold improvements 81,114 70,945 Autos and trucks 127,381 112,091 Machinery and equipment 109,532 93,491 Computer equipment 34,192 32,380 Furniture and fixtures 9,935 9,670 Fixed assets in progress 14,653 10,869 Total property and equipment 457,065 405,222 Less: Accumulated depreciation ( 233,136 ) ( 211,513 ) Property and equipment, net $ 223,929 $ 193,709 Accrued expenses and other current liabilities: Salaries and payroll deductions $ 23,378 $ 22,318 Performance-based compensation 30,346 70,609 Taxes payable 21,209 16,479 Other current liabilities 59,743 59,115 Accrued expenses and other current liabilities $ 134,676 $ 168,521 67 Note 5 - Debt The table below presents the components of our debt (in thousands): December 31, 2023 2022 Variable rate debt Current portion of long-term debt: Australian credit facility $ 13,203 $ 12,542 Current portion of term loans under credit facility 25,000 12,500 Short-term borrowings and current portion of long-term debt 38,203 25,042 Long-term portion: Revolving credit facility 252,500 519,711 Term loans under credit facility 462,500 487,500 Term facility 109,937 157,250 Receivables securitization facility 191,700 199,500 Less: financing costs, net 1,520 2,200 Long-term debt, net 1,015,117 1,361,761 Total debt $ 1,053,320 $ 1,386,803 Credit Facility Our Credit Facility, most recently amended on June 30, 2023, provides for $ 1.25 billion in borrowing capacity, consisting of a $ 750.0 million 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 and matures on September 25, 2026. On June 30, 2023, we entered into the Second Amendment to the Second Amended and Restated Credit Agreement (the Credit Agreement) among us as U.S. Borrower, SCP Distributors Canada Inc. as Canadian Borrower, SCP International, Inc. as Euro Borrower, the Subsidiary Guarantors party thereto, Wells Fargo Bank, National Association, as Administrative Agent, and certain other lenders party thereto. The amendment updated the index used for the Base Rate (as further defined within the Credit Facility Amendment) from LIBOR to Term SOFR. The amendment also increased the maximum amount for the Accounts Securitization (as further defined within the Credit Agreement) from $ 350.0 million to $ 500.0 million and increased the Canadian Dollar Commitment, Euro Commitment and Swingline Commitment (all as further defined within the Credit Facility Agreement) to $ 50.0 million each. Our term loans under the credit facility 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 September 25, 2026. All other terms of any such term loans would be substantially similar to those governing revolving credit loans under the Credit Agreement. All obligations under the Credit Agreement are guaranteed on an unsecured basis by substantially all of our existing and future domestic subsidiaries. The Credit Agreement also contains various customary affirmative and negative covenants and events of default. The occurrence of any of these events of default would permit the lenders to, among other things, require immediate payment of all amounts outstanding under the Credit Agreement. At December 31, 2023, there was $ 740.0 million outstanding, including a $ 487.5 million term loan, 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. Revolving and term borrowings under the Credit Facility bear interest, at our option, at either of the following and, in each case, plus an applicable margin: a. a base rate, which is the highest of (i) the Agent’s prime rate, (ii) the Federal Funds Rate plus 0.500 % and (iii) Adjusted Term SOFR (defined below) for a one-month tenor in effect on such day plus 1.000 %; or 68 b. Adjusted Term SOFR, the rate per annum equal to Term SOFR for such calculation plus the Term SOFR adjustment of 0.10 %. Borrowings by the Canadian Borrower bear interest, at the Canadian Borrower’s option, at either of the following and, in each case, plus an applicable margin: a. a base rate, which is the greatest of (i) the Canadian Reference Bank prime rate and (ii) the Canadian Dealer Offered Rate (CDOR) plus 1.000 %; or b. CDOR. Borrowings by the Euro Borrower bear interest at the Adjusted Eurocurrency rate plus an applicable margin. Borrowings under any swingline loans under the Credit Facility bear interest, at our option, at either of the following and, in each case, plus an applicable margin: a. the Term SOFR Swingline Rate, the greater of (i) Adjusted Term SOFR for a period equal to one month (commencing on the date of determination of such interest rate) and (ii) a floor rate specified in the Credit Agreement; or b. a base rate, which is the highest of (i) the Agent’s prime rate, (ii) the Federal Funds Rate plus 0.500 % and (iii) Adjusted Term SOFR for a one-month tenor in effect on such day plus 1.000 %. The interest rate margins on the borrowings and letters of credit issued under the Credit Agreement are based on our leverage ratio and will range from 0.000 % to 0.425 % on Base Rate, Canadian Base Rate and Base Rate swingline loans and from 0.910 % to 1.425 % on CDOR, Adjusted Term SOFR, Adjusted Eurocurrency rate and Term SOFR Swingline Rate loans (with all such rates being calculated in accordance with the terms and by reference to the definitions specified in the Credit Agreement). We are also required to pay an annual facility fee with respect to the lenders’ aggregate revolving credit agreement, the amount of which is based on our leverage ratio. Term Facility On December 30, 2019, we along with certain of our subsidiaries entered into a $ 185.0 million term facility (the “Term Facility”) with Bank of America, N.A. pursuant to a credit agreement subsequently amended on October 12, 2021, among us, as Borrower and Bank of America, N.A., as the Lender. On June 30, 2023, we entered into the Second Amendment to Credit Agreement (the “Term Facility Agreement”) among us, as Borrower, the Guarantors party thereto and Bank of America, N.A. as Lender. The amendment updated the index used for the Base Rate (as further defined within the Term Facility Agreement) from LIBOR to Term SOFR. The Term Facility matures on December 30, 2026. Under the Term Facility, we are required to make quarterly amortization payments in installments of 1.250 % of the Term Facility on the last business day of each quarter. 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. Our obligations under the Term Facility are guaranteed on an unsecured basis by substantially all of our existing and future domestic subsidiaries. The Term Facility Agreement contains various customary affirmative and negative covenants and events of default. The occurrence of any of these events of default would permit the lenders to, among other things, require immediate payment of all amounts outstanding under the Term Facility Agreement. At December 31, 2023, the Term Facility had an outstanding balance of $ 109.9 million at a weighted average effective interest rate of 6.6 %. Borrowings under the Term Facility bear interest, at our option, at either of the following and, in each case, plus an applicable margin: a. a base rate, which is the greatest of (i) the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System, as published by the Federal Reserve Bank of New York on the business day next succeeding such day plus 0.50 %, (ii) Bank of America’s “prime rate,” or (iii) the Term SOFR Rate (defined below) plus 1.00 %; or b. the Term SOFR Rate, which is the greater of (i) the rate per annum equal to the Term SOFR Screen Rate administered by CME Group Benchmark Administration Limited or any successor administrator plus the SOFR adjustment of 0.10 % or (ii) a floor rate specified in the Term Facility Agreement. 69 The interest rate margins on the borrowings under the Term Facility are based on our leverage ratio and will range from 0.000 % to 0.625 % on Base Rate borrowings and 1.000 % to 1.625 % on Adjusted Term SOFR Rate borrowings (with all such rates being calculated in accordance with the terms and by reference to the definitions specified in the Term Facility Agreement). Receivables Securitization Facility On November 1, 2022, we and certain of our subsidiaries entered into an agreement (the “Amended Receivables Purchase Agreement”) amending our two-year receivable securitization facility. As amended, the Receivables Facility has a maximum facility limit of $ 350.0 million in the months of April through August and a funding capacity that ranges from $ 210.0 million to $ 340.0 million during the remaining months of the year. The maturity date of the Receivables Facility is November 1, 2024. Amounts outstanding under the Receivables Facility bear interest at Term SOFR plus an applicable margin of 0.75 %. The Receivables Facility provides for the sale of certain of our receivables to a wholly owned subsidiary (the “Securitization Subsidiary”). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities. Upon payment of the receivables by customers, rather than remitting to the financial institutions the amounts collected, we retain such collections as proceeds for the sale of new receivables until payments become due to the financial institutions. The Receivables Facility is subject to terms and conditions (including representations, covenants and conditions precedent) customary for transactions of this type. Additionally, an amortization event will occur if we fail to meet certain covenants, including maintaining a maximum average total leverage ratio (average total funded debt/EBITDA) of 3.25 to 1.00 and a minimum fixed charge coverage ratio (EBITDAR/cash interest expense plus rental expense) of 2.25 to 1.00. At December 31, 2023, there was $ 191.7 million outstanding under the Receivables Facility at a weighted average effective interest rate of 6.2 %, excluding commitment fees. We also pay an unused fee on the excess of the facility limit over the average daily capital outstanding. The unused fee is 0.25 % if utilization is less than 50 % or 0.35 % otherwise. We pay this fee monthly in arrears. Australian Seasonal Credit Facility In the second quarter of 2017, Pool Systems Pty. Ltd. (PSL) entered into a credit facility to fund expansion and supplement working capital needs. The credit facility provides a borrowing capacity of AU$ 20.0 million. Cash Pooling Arrangement Certain of our foreign subsidiaries entered into a cash pooling arrangement with a financial institution for cash management purposes. This arrangement allows the participating subsidiaries to withdraw cash from the financial institution to the extent that aggregate cash deposits held by these subsidiaries are available at the financial institution. To the extent the participating subsidiaries are in an overdraft position, such overdrafts are recorded as short-term borrowings under a committed cash overdraft facility. These borrowings bear interest at a variable rate based on 3-month Euro Interbank Offered Rate (EURIBOR), plus a fixed margin. We also pay a commitment fee on the average outstanding balance. This fee is paid annually in advance. Our borrowing capacity is € 14.0 million. Maturities of Long-Term Debt The table below presents maturities of long-term debt, excluding unamortized deferred financing costs, for the next five years (in thousands): 2024 $ 229,903 2025 37,500 2026 787,438 2027 — 2028 — 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. 70 Interest Rate Swaps Our interest rate swaps in effect during the year were previously forward-starting and converted the variable interest rate to a fixed interest rate on a portion of our variable rate borrowings. Interest expense related to the notional amounts under our swap contracts was based on the fixed rates plus the applicable margin on our variable rate borrowings. Changes in the estimated fair value of these interest rate swap contracts were recorded to Accumulated other comprehensive loss on the Consolidated Balance Sheets. We currently have two interest rate swap contracts in place. The following table provides additional details related to these swap contracts: Derivative Inception Date Effective Date Termination Date Notional Amount (in millions) Fixed Interest Rate Interest rate swap 1 February 5, 2020 February 26, 2021 February 28, 2025 $ 150.0 1.3260 % Interest rate swap 2 March 9, 2020 September 29, 2022 February 26, 2027 $ 150.0 0.6690 % We have entered into an additional forward-starting interest rate swap contract to extend the hedged period for future interest payments on a portion of our variable rate borrowings. The following table provides details related to our forward-starting interest rate swap contract: Derivative Inception Date Effective Date Termination Date Notional Amount (in millions) Fixed Interest Rate Forward-starting interest rate swap March 9, 2020 February 28, 2025 February 26, 2027 $ 150.0 0.7630 % Two of our interest rate swap contracts terminated on September 29, 2022. The following table provides additional details related to these former swap contracts: Derivative Inception Date Effective Date Termination Date Notional Amount (in millions) Fixed Interest Rate Former interest rate swap 1 May 7, 2019 November 20, 2020 September 29, 2022 $ 75.0 2.0925 % Former interest rate swap 2 July 25, 2019 November 20, 2020 September 29, 2022 $ 75.0 1.5500 % The net difference between interest paid and interest received related to our swap agreements resulted in an interest benefit of $ 12.2 million in 2023 and $ 0.8 million in 2022 and expense of $ 4.3 million in 2021. Failure of our swap counterparties would result in the loss of any potential benefit to us under our swap agreements. In this case, we would still be obligated to pay the variable interest payments underlying our debt agreements. Additionally, failure of our swap counterparties would not eliminate our obligation to continue to make payments under our existing swap agreements if we continue to be in a net pay position. Financial and Other Covenants The Credit Facility and Term Facility limit the declaration and payment of dividends on our common stock to a manner consistent with past practice, provided no default or event of default has occurred and is continuing, or would result from the payment of dividends. We may declare and pay quarterly dividends so long as (i) the amount per share of such dividends is not greater than the most recently publicly announced dividends per share and (ii) our Average Total Leverage Ratio is less than 3.25 to 1.00 both immediately before and after giving pro forma effect to such dividends. Under the Credit Facility and Term Facility, we may repurchase shares of our common stock provided no default or event of default has occurred and is continuing, or would result from the repurchase of shares, and our maximum average total leverage ratio (determined on a pro forma basis) is less than 3.25 to 1.00. Other covenants include restrictions on our ability to grant liens, incur indebtedness, make investments, merge or consolidate, and sell or transfer assets. Failure to comply with any of our financial covenants or any other terms of the Credit Facility and the Term Facility could result in higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt. 71 As of December 31, 2023, we were in compliance with all covenants and financial ratio requirements related to the Credit Facility, the Term Facility and the Receivables Facility. Deferred Financing Costs We capitalize financing costs we incur related to implementing and amending our debt arrangements. We record these costs as a reduction of Long-term debt, net on our Consolidated Balance Sheets and amortize them over the contractual life of the related debt arrangements. The table below summarizes changes in deferred financing costs for the past two years (in thousands): December 31, 2023 2022 Deferred financing costs: Balance at beginning of year $ 4,212 $ 4,042 Financing costs deferred 52 170 Balance at end of year 4,264 4,212 Less: Accumulated amortization ( 2,744 ) ( 2,012 ) Deferred financing costs, net of accumulated amortization $ 1,520 $ 2,200 Note 6 - Share-Based Compensation Share-Based Plans Current Plan In May 2007, our shareholders approved the 2007 Long-Term Incentive Plan (the 2007 LTIP), which authorizes the Compensation Committee of our Board of Directors (the Board) to grant non-qualified stock options and restricted stock awards to employees, directors, consultants or advisors. In May 2016, our shareholders approved an amendment and restatement of the 2007 Long-Term Incentive Plan (the Amended 2007 LTIP) and increased the number of shares that may be issued to a total of 9,315,000 shares. As of December 31, 2023, we had 3,947,708 shares available for future issuance including 853,337 shares that may be issued as restricted stock. Stock options granted under the Amended 2007 LTIP have an exercise price equal to our stock’s closing market price on the grant date and expire ten years from the grant date. Restricted stock awards granted under the Amended 2007 LTIP are issued at no cost to the grantee. Both stock options and restricted stock awards vest over time depending on an employee’s length of service with the company. Share-based awards to our employees generally vest either five years from the grant date or on a three/five year split vest schedule, where half of the awards vest three years from the grant date and the remainder of the awards vest five years from the grant date. Share-based awards to our non-employee directors vest one year from the grant date. Restricted stock awards to our employees contain performance-based criteria in addition to the service-based vesting criteria described above. The awards provide for a three-year performance period for the metric to be achieved. If the performance metric fails to be met, it may be extended by one or two years ; however, if it is not met by the end of the extended performance period, then all shares of performance-based restricted stock will be immediately forfeited and canceled. For each of the performance-based grants from 2016 through 2021, we achieved the performance condition in the initial three-year performance period. For the performance-based grants in 2022 and 2023, we have concluded that the performance condition is probable to be attained in the initial three-year performance period. 72 Stock Option Awards The following table summarizes stock option activity under our share-based plans for the year ended December 31, 2023: Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Balance at December 31, 2022 642,925 $ 154.57 Granted 33,408 357.52 Less: Exercised 90,439 92.52 Forfeited 15,172 293.44 Balance at December 31, 2023 570,722 $ 173.13 4.22 $ 129,309,839 Exercisable at December 31, 2023 371,551 $ 102.10 2.48 $ 110,210,899 The following table presents information about stock options outstanding and exercisable at December 31, 2023: Outstanding Stock Options Exercisable Stock Options Range of Exercise Prices Shares Weighted Average Remaining Contractual Term (Years) Weighted Average Exercise Price Shares Weighted Average Exercise Price $ 58.26 to $ 80.78 214,410 1.26 $ 70.78 214,410 $ 70.78 $ 80.79 to $ 220.01 216,574 4.53 155.78 155,415 142.35 $ 220.02 to $ 515.41 139,738 8.26 357.05 1,726 370.02 570,722 4.22 $ 173.13 371,551 $ 102.10 The following table summarizes the cash proceeds and tax benefits realized from the exercise of stock options: Year Ended December 31, (in thousands, except share amounts) 2023 2022 2021 Options exercised 90,439 71,737 274,253 Cash proceeds $ 8,368 $ 6,247 $ 14,435 Intrinsic value of options exercised $ 23,356 $ 21,976 $ 118,305 Tax benefits realized $ 5,839 $ 5,494 $ 29,576 We estimated the fair value of employee stock option awards at the grant date based on the assumptions summarized in the following table: Year Ended December 31, (Weighted average) 2023 2022 2021 Expected volatility 31.0 % 28.9 % 27.0 % Expected term 7.4 years 7.1 years 6.9 years Risk-free interest rate 4.01 % 2.92 % 1.00 % Expected dividend yield 1.15 % 1.15 % 1.15 % Grant date fair value $ 130.74 $ 116.56 $ 83.05 We calculated expected volatility over the expected term of the awards based on the historical volatility of our common stock. We use weekly price observations for our historical volatility calculation because we believe this provides the most appropriate measurement of volatility given the trading patterns of our common stock. We estimated the expected term based on the vesting period of the awards and our historical exercise activity for awards with similar characteristics. The risk-free interest rate is based on the U.S. Treasury zero-coupon issues with a remaining term approximating the expected term of the option. We determined the expected dividend yield based on the dividends we anticipate paying over the expected term. 73 For purposes of recognizing share-based compensation expense, we ratably expense the estimated fair value of employee stock options over the options’ requisite service period. The requisite service period for our share-based awards is either the vesting period, or if shorter, the period from the grant date to the date the employee becomes eligible to retire under our share-based award agreements. We recognize compensation cost for awards with graded vesting using the graded vesting recognition method. We estimate a forfeiture rate to calculate our share-based compensation expense for our share-based awards based on an analysis of actual forfeitures. We continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors. The following table presents the total share-based compensation expense for stock option awards for the past three years (in thousands): 2023 2022 2021 Option grants share-based compensation expense $ 4,618 $ 3,413 $ 2,846 Option grants share-based compensation tax benefits 1,154 853 712 At December 31, 2023, the unamortized compensation expense related to stock option awards totaled $ 8.1 million . We anticipate recognizing this expense over a weighted average period o f 2.8 yea rs. Restricted Stock Awards The table below presents restricted stock award activity under our share-based plans for the year ended December 31, 2023: Shares Weighted Average Grant Date Fair Value Balance unvested at December 31, 2022 212,717 $ 256.97 Granted (at market price) (1) 55,196 357.96 Less: Vested 58,705 172.24 Forfeited 5,571 326.45 Balance unvested at December 31, 2023 203,637 $ 306.79 (1) The majority of these shares contain performance-based vesting conditions. At December 31, 2023, the unamortized compensation expense related to the restricted stock awards totaled $ 23.0 million . We anticipate recognizing this expense over a weighted average period of 2.4 years. The table below presents the total number of restricted stock awards that vested for the past three years and the related fair value of those awards (in thousands, except share amounts): 2023 2022 2021 Restricted stock awards - shares vested 58,705 78,931 69,069 Fair value of restricted stock awards vested $ 20,906 $ 37,258 $ 24,005 The following table presents the total share-based compensation expense for restricted stock awards for the past three years (in thousands): 2023 2022 2021 Restricted stock awards share-based compensation expense $ 14,487 $ 11,024 $ 11,543 Employee Stock Purchase Plan We maintain the Pool Corporation Amended and Restated Employee Stock Purchase Plan (the ESPP), which was last approved by the Board and our stockholders in 2016. Under the ESPP, employees who meet minimum age and length of service requirements may purchase stock at 85 % of the lower of: a. the closing price of our common stock at the end of a six month plan period ending either July 31 or January 31; or b. the average of the beginning and ending closing prices of our common stock for such six month period. 74 No more than 956,250 shares of our common stock may be issued under the ESPP. For the two six month offering periods in each of the last three years, our employees purchased the following aggregate number of shares: 2023 2022 2021 7,640 7,658 8,649 The grant date fair value for the most recent ESPP purchase period ended July 31, 2023 was $ 57.71 per share. Share-based compensation expense related to our ESPP was $ 0.5 million in 2023, $ 0.5 million in 2022 and $ 0.8 million in 2021. Note 7 - Income Taxes Income before income taxes and equity in earnings is attributable to the following jurisdictions (in thousands): Year Ended December 31, 2023 2022 2021 United States $ 662,138 $ 919,461 $ 752,957 Foreign 25,998 65,411 71,188 Total $ 688,136 $ 984,872 $ 824,145 The provision for income taxes consisted of the following (in thousands): Year Ended December 31, 2023 2022 2021 Current: Federal $ 120,122 $ 164,135 $ 124,379 State and other 34,603 57,459 44,783 Total current provision for income taxes 154,725 221,594 169,162 Deferred: Federal 9,929 13,592 2,970 State and other 430 1,577 1,680 Total deferred provision for income taxes 10,359 15,169 4,650 Provision for income taxes $ 165,084 $ 236,763 $ 173,812 A reconciliation of the U.S. federal statutory tax rate to our effective tax rate on Income before income taxes and equity in earnings is as follows: Year Ended December 31, 2023 2022 2021 Federal statutory rate 21.00 % 21.00 % 21.00 % Change in valuation allowance 0.05 ( 0.02 ) ( 0.11 ) Stock-based compensation ( 0.97 ) ( 1.09 ) ( 3.67 ) Other, primarily state income tax rate 3.91 4.15 3.87 Total effective tax rate 23.99 % 24.04 % 21.09 % We reduce federal and state income taxes payable by the tax benefits associated with the exercise of deductible nonqualified stock options and the lapse of restrictions on deductible restricted stock awards. To the extent realized tax deductions exceed the amount of previously recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. We record all excess tax benefits or deficiencies as income tax benefit or expense in the income statement. We recorded excess tax benefits of $ 6.7 million to our income tax provision in 2023, $ 10.8 million in 2022 and $ 30.0 million in 2021. 75 The table below presents the components of our deferred tax assets and liabilities (in thousands): December 31, 2023 2022 Deferred tax assets: Product inventories $ 11,764 $ 10,932 Accrued expenses 4,724 2,028 Leases 73,874 65,852 Share-based compensation 9,977 8,636 Uncertain tax positions 3,753 3,253 Net operating losses 1,447 987 Other 4,716 4,139 Total non-current 110,255 95,827 Less: Valuation allowance ( 1,133 ) ( 815 ) Component reclassified for net presentation ( 107,733 ) ( 94,034 ) Total non-current, net 1,389 978 Total deferred tax assets 1,389 978 Deferred tax liabilities: Trade discounts on purchases 2,112 3,995 Prepaid expenses 6,610 4,903 Leases 73,092 64,549 Intangible assets, primarily goodwill 60,902 48,836 Depreciation 26,000 21,998 Interest rate swaps 6,438 8,512 Total non-current 175,154 152,793 Component reclassified for net presentation ( 107,733 ) ( 94,034 ) Total non-current, net 67,421 58,759 Total deferred tax liabilities 67,421 58,759 Net deferred tax liability $ 66,032 $ 57,781 At December 31, 2023, certain of our international subsidiaries had tax loss carryforwards totaling approximately $ 5.0 million, which expire in various years after 2024. Deferred tax assets related to the tax loss carryforwards of these international subsidiaries were $ 1.4 million as of December 31, 2023 and $ 1.0 million as of December 31, 2022. We have recorded a corresponding valuation allowance of $ 1.0 million and $ 0.7 million in the respective years. As of December 31, 2023, United States income taxes were not provided on earnings or cash balances of our foreign subsidiaries, outside of the provisions of the transition tax from U.S. tax reform enacted in December 2017. As we have historically invested or expect to invest the undistributed earnings indefinitely to fund current cash flow needs in the countries where held, additional income tax provisions may be required. Determining the amount of unrecognized deferred tax liability on these undistributed earnings and cash balances is not practicable due to the complexity of tax laws and regulations and the varying circumstances, tax treatments and timing of any future repatriation. 76 The following table summarizes the activity related to uncertain tax positions for the past three years (in thousands): 2023 2022 2021 Balance at beginning of year $ 15,489 $ 13,297 $ 15,553 Increases for tax positions taken during a prior period — 275 — Increases for tax positions taken during the current period 4,457 5,264 3,518 Decreases resulting from the expiration of the statute of limitations 2,075 3,347 3,185 Decreases relating to settlements — — 2,589 Balance at end of year $ 17,871 $ 15,489 $ 13,297 The total amount of unrecognized tax benefits that, if recognized, would decrease the effective tax rate was $ 14.1 million at December 31, 2023 and $ 12.2 million at December 31, 2022. We record interest expense related to unrecognized tax benefits in Interest and other non-operating expenses, net, while we record related penalties in Selling and administrative expenses on our Consolidated Statements of Income. For unrecognized tax benefits, we had interest expense of $ 0.4 million in 2023 and interest income of $ 0.1 million in 2022 and $ 0.6 million in 2021. Accrued interest related to unrecognized tax benefits was approximately $ 1.9 million at December 31, 2023 and $ 1.6 million at December 31, 2022. We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2020. 77 Note 8 - Earnings Per Share We calculate basic and diluted earnings per share using the two-class method. Earnings per share under the two-class method is calculated using net income attributable to common stockholders, which is net income reduced by the earnings allocated to participating securities. Our participating securities include share-based payment awards that contain a non-forfeitable right to receive dividends and are considered to participate in undistributed earnings with common shareholders. Participating securities excluded from weighted average common shares outstanding were 207,000 for the year ended December 31, 2023, 221,000 for the year ended December 31, 2022 and 268,000 for the year ended December 31, 2021. The table below presents the computation of earnings per share, including the reconciliation of basic and diluted weighted average shares outstanding (in thousands, except per share data): Year Ended December 31, 2023 2022 2021 Net income $ 523,229 $ 748,462 $ 650,624 Amounts allocated to participating securities ( 2,771 ) ( 4,151 ) ( 4,321 ) Net income attributable to common stockholders $ 520,458 $ 744,311 $ 646,303 Weighted average common shares outstanding: Basic 38,704 39,409 39,876 Effect of dilutive securities: Stock options and employee stock purchase plan 293 397 604 Diluted 38,997 39,806 40,480 Earnings per share attributable to common stockholders: Basic $ 13.45 $ 18.89 $ 16.21 Diluted $ 13.35 $ 18.70 $ 15.97 Anti-dilutive stock options excluded from diluted earnings per share computations (1) 64 34 1 (1) Since these options have exercise prices that are higher than the average market prices of our common stock, including them in the calculation would have an anti-dilutive effect on earnings per share. Note 9 - Commitments and Contingencies Commitments We lease facilities for our corporate and administrative offices, sales centers and centralized shipping locations under operating leases that expire in various years through 2036. Most of our leases contain five-year terms with renewal options that allow us to extend the lease term beyond the initial period, subject to terms agreed upon at lease inception. Based on our leasing practices and contract negotiations, we determined that we are not reasonably certain to exercise the renewal options and, as such, we have not included optional renewal periods in our measurement of operating lease assets, liabilities and expected lease terms. We exclude short-term leases from our Consolidated Balance Sheets and combine lease and non-lease components. For leases with step rent provisions whereby the rental payments increase incrementally over the life of the lease, we recognize expense on a straight-line basis determined by the total lease payments over the lease term. To the extent we determine that future obligations related to real estate taxes, insurance and other lease components are variable, we exclude them from the measurement of our operating lease assets and liabilities. Some of our real estate agreements include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. 78 The table below presents rent expense associated with facility and vehicle operating leases for the past three years (in thousands): Lease Cost Classification 2023 2022 2021 Operating lease cost (1) Selling and administrative expenses $ 92,939 $ 81,750 $ 71,255 Variable lease cost Selling and administrative expenses $ 24,535 $ 22,326 $ 18,755 (1) Includes short-term lease cost, which is not material. Based on our lease portfolio as of December 31, 2023, the table below sets forth the approximate future lease payments related to operating leases with initial terms of one year or more (in thousands): 2024 $ 89,568 2025 80,068 2026 67,182 2027 50,500 2028 28,020 Thereafter 33,092 Total lease payments 348,430 Less: interest 37,266 Present value of lease liabilities $ 311,164 To calculate the present value of our lease liabilities, we determined our incremental borrowing rate based on the effective interest rate on our Credit Facility adjusted for a collateral feature similar to that of our leased properties, as we are unable to derive implicit rates from our existing leases. The table below presents the weighted-average remaining lease term (years) of our operating leases and the weighted-average discount rate used in the above calculation: December 31, Lease Term and Discount Rate for Operating Leases 2023 2022 2021 Weighted-average remaining lease term (years) 4.81 5.08 5.27 Weighted-average discount rate 4.04 % 3.05 % 2.57 % The table below presents the amount of cash paid for amounts included in the measurement of lease liabilities and lease assets obtained in exchange for lease obligations (in thousands): Year Ended December 31, 2023 2022 2021 Operating cash flows for lease liabilities $ 84,703 $ 75,281 $ 67,197 Operating lease assets obtained in exchange for operating lease obligations $ 107,869 $ 91,622 $ 94,493 79 Contingencies From time to time, we are subject to various claims and litigation arising in the ordinary course of business, including product liability, personal injury, commercial, contract and employment matters. Each quarter, we evaluate developments related to claims and litigation and record a liability if we deem a loss to be probable and estimable. When evaluating these matters for accrual and disclosure, we consider factors such as historical experience, specific facts and claims asserted, the likelihood we will prevail and the magnitude of any potential loss. The outcome of any litigation is inherently unpredictable. Based on currently available facts, we do not believe that the ultimate resolution of any of these claims and litigation matters will have a material adverse impact on our financial condition, results of operations or cash flows. We do not believe our exposure for any of these matters is material for disclosure, either individually or in the aggregate. Note 10 - Related Party Transactions We lease corporate and administrative offices from NCC, an entity we have held a 50 % ownership interest in since 2005. NCC owns and operates an office building in Covington, Louisiana. We lease corporate and administrative offices from NCC, occupying approximately 60,000 square feet of office space, and we pay rent of $ 0.1 million per month. Our lease term ends May 2025. The table below presents rent expense associated with this lease for the past three years (in thousands): 2023 2022 2021 NCC $ 1,222 $ 1,222 $ 1,222 Note 11 - Employee Benefit Plans We offer a 401(k) savings and retirement plan, which is a defined contribution plan that provides benefits for substantially all employees who meet length of service requirements. Eligible employees are able to contribute up to 75 % of their compensation, subject to the federal dollar limit. For plan participants, we provide a matching contribution. We contribute a total maximum match on employee contributions of up to 4 % of their compensation, with a 100 % match on the first 3 % of compensation deferred and a 50 % match on deferrals between 3 % and 5 % of compensation. We also offer retirement plans for certain of our international entities. The plan funding is calculated as a percentage of the employee’s earnings and in compliance with local laws and practices. The related expense is not material and is included in the table below. We have a nonqualified deferred compensation plan that allows certain employees who occupy key management positions to defer salary and bonus amounts. This plan also provides a matching contribution similar to that provided under our 401(k) plan to the extent that a participant’s contributions to the 401(k) plan are limited by IRS deferral and compensation limitations. The total combined company matching contribution provided to a participant under the 401(k) plan and the nonqualified deferred compensation plan for any one year may not exceed 4 % of a participant’s salary and bonus. The employee and company matching contributions are invested in certain equity and fixed income securities based on individual employee elections. The table below sets forth our contributions for the past three years (in thousands): 2023 2022 2021 Defined contribution and international retirement plans $ 10,973 $ 10,230 $ 9,308 Deferred compensation plan 218 283 239 80 Note 12 - Quarterly Financial Data (Unaudited) The table below summarizes the unaudited quarterly results of operations for the past two years (in thousands, except per share data): Quarter 2023 2022 First Second Third Fourth First Second Third Fourth Net sales $ 1,206,774 $ 1,857,363 $ 1,474,407 $ 1,003,050 $ 1,412,650 $ 2,055,818 $ 1,615,339 $ 1,095,920 Gross profit 369,755 567,783 428,731 293,775 447,189 666,804 503,687 315,731 Net income 101,699 232,250 137,843 51,437 179,261 307,283 190,055 71,863 Earnings per share: Basic $ 2.60 $ 5.95 $ 3.54 $ 1.33 $ 4.46 $ 7.71 $ 4.82 $ 1.84 Diluted $ 2.58 $ 5.91 $ 3.51 $ 1.32 $ 4.41 $ 7.63 $ 4.78 $ 1.82 The sum of basic and diluted earnings per share for each of the quarters may not equal the total basic and diluted earnings per share for the annual periods because of rounding differences and a difference in the way that in-the-money stock options are considered from quarter to quarter. 81 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.