Pool Corp(POOL) - 2022 Q4 - Annual Report

PART I Item 1. Business Pool Corporation is the world's largest wholesale distributor of swimming pool supplies, equipment, and related leisure products General Business Description The company is the world's largest wholesale distributor of pool supplies, equipment, and related leisure products - Pool Corporation is the world's largest wholesale distributor of swimming pool supplies, equipment, and related leisure products, and a leading distributor of irrigation and landscape products in the United States[13] - The company adds value by purchasing from numerous manufacturers and distributing products to a highly fragmented customer base on favorable terms[14] - As of December 31, 2022, the company operated 420 sales centers in North America, Europe, and Australia through five distribution networks: SCP Distributors, Superior Pool Products, Horizon Distributors, National Pool Tile, and Sun Wholesale Supply, Inc[14][16] Industry Overview The swimming pool and landscape industries are driven by new construction, remodeling, and non-discretionary maintenance spending - The swimming pool industry is expected to grow with increased penetration of new pools, remodel/replacement activities due to aging pools, technological advancements, and demand for environmentally sustainable products[14] - Favorable demographic and socioeconomic trends, such as population migration to warmer U.S. regions and increased homeowner spending on outdoor living spaces, positively impact the industry[15][17] - About 60% of consumer spending in the pool industry is for maintenance and minor repair, creating non-discretionary demand[15] - The swimming pool remodel, renovation, and upgrade market accounts for 21% to 23% of consumer spending, driven by aging pools and enhanced feature products[18] - New swimming pool construction comprises 17% to 18% of consumer spending, influenced by perceived benefits of pool ownership and competition with other discretionary purchases[19] - The irrigation and landscape industry shares similar long-term growth rates, with 30-35% of spending on irrigation and 65-70% on landscape maintenance, power equipment, hardscapes, and specialty outdoor products[20] Economic Environment and Trends Industry performance is influenced by housing trends and economic conditions, with recent inflationary pressures expected to moderate - Housing market trends, consumer credit availability, and general economic conditions (GDP) significantly affect the industry, particularly new construction and major refurbishment projects[21] - New pool construction decreased 16% in 2022 to approximately 98,000 units, down from 117,000 units in 2021, after a 22% increase in 2021 over 2020[23] - The company expects continued investment in outdoor living spaces, benefiting from population migration, strong housing demand, and product advancements[23] - Inflationary product cost increases were approximately 10% in 2022 (compared to 7-8% in 2021) and are projected to moderate to about 4% in 2023[24] Business Strategy and Growth Strategy The company's strategy focuses on industry promotion, customer support, operational efficiency, and expansion through acquisitions and new locations - The company's mission is to provide exceptional value to customers and suppliers, return to shareholders, and opportunities to employees[25] - Core strategies include promoting industry growth (e.g., digital advertising, websites like swimmingpool.com), fostering customer business growth (e.g., marketing support, training, showrooms), and continuously improving operational effectiveness (capacity creation)[25][26][27] - Ongoing investments in digital transformation and technology (e.g., Pool360, Horizon 24/7, BlueStreak mobile app) aim to enhance customer experience and operational efficiency[27][28] - Growth is pursued through new sales center openings, acquisitions, expansion of existing centers, and increasing market share with Pool Corporation-branded and exclusive products[29][30] Customers and Products The company serves a diverse customer base of small businesses with a broad product portfolio, with maintenance products comprising the majority of sales - The company serves approximately 125,000 customers, primarily small, family-owned businesses like pool remodelers, builders, specialty retailers, repair/service businesses, and irrigation/landscape contractors[31][33] - No single customer accounted for 10% or more of sales in 2022[31] - Primary markets (California, Texas, Florida, Arizona) represented approximately 53% of 2022 net sales[33] - The company offers over 200,000 manufacturer and Pool Corporation-branded products across more than 600 product lines and 50 categories[36] Product Category Sales as % of Total Net Sales | Product Category | 2022 | 2021 | 2020 | | :----------------- | :--- | :--- | :--- | | Pool and hot tub chemicals | 13% | 9% | 10% | - The increase in chemical sales percentage from 2021 to 2022 was due to inflation, improved supply, strong demand for non-discretionary maintenance products, and the acquisition of Porpoise Pool & Patio, Inc[36] - New product technology, such as energy-efficient products (variable speed pumps, LED lights) and smart home integration, presents significant growth opportunities[38] - The commercial swimming pool market is a key growth opportunity, with sales accelerating in 2021 and sustained in 2022 after a decline in 2020 due to COVID-19[39][40] - In 2022, maintenance and minor repair products (non-discretionary) accounted for approximately 60% of sales and gross profits, while remodel, renovation, upgrade, construction, and installation (partially discretionary) accounted for approximately 40%[41] Operating Strategy and Distribution The company utilizes distinct distribution networks and strategically located sales centers to provide diverse products and services efficiently - The company operates distinct distribution networks (SCP, Superior, Horizon, NPT, Sun Wholesale) to offer diverse product selections and services[43] - The NPT network distributes swimming pool tile, decking materials, and interior pool surfacing products, leveraging consumer showrooms and virtual tools (NPT® Backyard mobile app) for design and selection[44] - The acquisition of Sun Wholesale Supply, Inc. in December 2021 expanded operations to service Pinch A Penny franchise locations and included a chemical packaging plant[45] - Sales centers are located near customer concentrations, offering product pickup or delivery. Four centralized shipping locations (CSLs) redistribute bulk-purchased products[47][49] Purchasing and Suppliers The company maintains strong supplier relationships, with a significant portion of products sourced from three key vendors - The company maintains good relationships with suppliers, benefiting from competitive pricing, return policies, and promotional allowances[50] - Early buy purchases, offering modest discounts for off-season delivery and later payment, were re-established in 2022 after being unavailable in 2020-2021 due to supply constraints[50] - A preferred vendor program encourages stocking products from fewer vendors to optimize profitability and shareholder return[51] - Largest suppliers in 2022 were Pentair plc (18%), Hayward Pool Products, Inc. (11%), and Zodiac Pool Systems, Inc. (9%) of the cost of products sold[52] Competition The company leads its industry but faces intense competition from various distributors and retailers in a market with low entry barriers - The company is the largest wholesale distributor in its industry but faces intense competition from regional and local distributors, three national irrigation/landscape distributors, mass market retailers, and large pool supply retailers[53] - Principal competitive factors include product breadth and availability, customer service quality, sales and marketing programs, business relationship consistency, competitive pricing, and geographic proximity[54][55] - Barriers to entry in the industry are relatively low[54] Environmental, Social and Governance (ESG) The company is committed to ESG principles, focusing on sustainable practices, human capital management, safety, and diversity - The company is committed to sustainable business practices, offering eco-friendly products, monitoring sourcing, and reducing its carbon footprint through energy-efficient systems[54][57] - Human Capital Management focuses on employee engagement, development, retention, and well-being, including competitive pay, benefits, training, and professional development[59] - The company aims for zero serious injuries through safety programs, training, and risk identification[60] - Diversity, Equity, and Inclusion (DEI) efforts focus on expanding workforce diversity, reviewing policies for equal opportunity, and creating an inclusive environment through programs like the Women's Interactive Network (WIN)[61][62][64] - The Board of Directors oversees risk management, including strategic, financial, cybersecurity, regulatory, and operational risks[70] Seasonality and Weather The business is highly seasonal, with sales and income peaking in the second and third quarters, and is significantly influenced by weather conditions - The business is seasonal, with sales and operating income highest in the second and third quarters (peak swimming pool use, installation, and remodeling)[71] - In 2022, approximately 59% of net sales and 67% of operating income were generated in Q2 and Q3[71] - Weather is a principal external factor; hot and dry conditions increase demand, while unseasonably cool weather or heavy rain decrease it[74][75] Government Regulations The company's operations are subject to extensive regulations governing the handling and sale of chemicals and fertilizers - The business is subject to local, federal, state, and international environmental, health, and safety regulations governing packaging, labeling, handling, transportation, storage, and sale of chemicals and fertilizers[76] - Algaecides and pest control products are regulated as pesticides under federal and state laws[76] Intellectual Property The company protects its brand and products through registered trademarks, patents, and internet domain names - The company maintains domestic and foreign registered trademarks and patents, primarily for its Pool Corporation and affiliate branded products, and owns numerous internet domain names[77] Geographic Areas The majority of the company's sales and assets are concentrated in the United States and North America Net Sales by Geographic Region (in thousands) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | United States | $5,674,909 | $4,749,459 | $3,579,990 | | International | $504,818 | $546,125 | $356,633 | | Total | $6,179,727 | $5,295,584 | $3,936,623 | Net Property and Equipment by Geographic Region (in thousands) | December 31, | 2022 | 2021 | 2020 | | :------------- | :--- | :--- | :--- | | United States | $185,117 | $171,408 | $100,857 | | International | $8,592 | $7,600 | $7,384 | | Total | $193,709 | $179,008 | $108,241 | - In 2022, approximately 96% of sales were generated in North America (including Canada and Mexico), 4% in Europe, and less than 1% in Australia[33] Website Access and Available Information The company provides public access to its SEC filings through its corporate website - The company's website (www.poolcorp.com) provides access to periodic reports (10-K, 10-Q, 8-K) filed with the SEC[81] - The company regularly evaluates potential acquisitions but generally does not announce them until completed[82] Item 1A. Risk Factors The company faces risks from macroeconomic conditions, industry competition, supply chain dependencies, cybersecurity, and regulatory changes - Demand for products is highly susceptible to unfavorable economic conditions, changes in consumer discretionary spending, and access to credit, particularly for new pool construction and major refurbishment[89][90] - The COVID-19 pandemic initially boosted demand but later caused supply chain disruptions and is now leading to moderating growth as home-centric trends ease[94] - Adverse weather conditions, potentially intensified by climate change, significantly impact sales, especially during peak seasons, and can lead to water use restrictions[95][96] - Maintaining favorable relationships with key suppliers (Pentair, Hayward, Zodiac) is critical, as disruptions or direct sales by manufacturers could adversely affect the business[98][99] - The company faces intense competition from regional/local distributors, mass market retailers, and internet retailers, with low barriers to entry[101][102][103] - Reliance on information technology systems means significant disturbances, breaches, or cyberattacks could disrupt operations and impact financial performance[113][114][115] - Increases in interest rates would raise debt servicing costs, and the transition away from LIBOR to SOFR could affect the cost of capital[133][134] - International operations expose the company to risks such as political/economic conditions, currency fluctuations, and trade restrictions[127][128] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments[139] Item 2. Properties The company operates 420 sales centers, primarily through leased properties, with key owned facilities in Louisiana and Florida - The company leases its corporate offices (60,000 sq ft) in Covington, Louisiana, and owns 14 sales center facilities across several states[141] - The acquisition of Porpoise Pool & Patio, Inc. in December 2021 included the corporate headquarters, Sun Wholesale Supply, Inc. facilities (200,000 sq ft), and a chemical packaging plant (105,000 sq ft) in Florida[142] - Most other properties are leased, with terms typically ranging from three to seven years, and 28 leases extending beyond seven years[143] Sales Centers by Network and Location (December 31, 2022) | Location | SCP | Superior | Horizon | NPT | Total | | :--------- | :--- | :------- | :------ | :-- | :---- | | United States | 196 | 73 | 88 | 19 | 376 | | International | 44 | — | — | — | 44 | | Total | 240 | 73 | 88 | 19 | 420 | Changes in Sales Centers (Year Ended December 31, 2022) | Category | Count | | :--------- | :---- | | December 31, 2021 | 410 | | Acquired location | 1 | | New locations | 10 | | Closed location | (1) | | December 31, 2022 | 420 | Item 3. Legal Proceedings The company is involved in ordinary course litigation that is not expected to have a material adverse financial impact - The company is subject to various claims and litigation in the ordinary course of business[150] - Management does not believe the ultimate resolution of these matters will have a material adverse impact on financial condition, results of operations, or cash flows[150] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[151] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq (POOL), with a history of quarterly dividends and discretionary share repurchases - Common stock is traded on the Nasdaq Global Select Market under the symbol 'POOL'[154] - As of February 17, 2023, there were approximately 740 holders of record of common stock[154] - Quarterly dividend payments began in Q2 2004 and have been increased seventeen times, including annually from 2011-2022[155] Cash Dividends Declared Per Common Share | Year | Amount | | :--- | :----- | | 2022 | $3.80 | | 2021 | $2.98 | | 2020 | $2.29 | Stock Performance Graph (Indexed Returns Years Ending December 31) | Company / Index | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | 12/31/21 | 12/31/22 | | :---------------- | :------- | :------- | :------- | :------- | :------- | :------- | | Pool Corporation | $100.00 | $115.97 | $167.58 | $296.54 | $453.64 | $244.81 | | S&P 500 Index | $100.00 | $95.62 | $125.72 | $148.85 | $191.58 | $156.88 | | Nasdaq Index | $100.00 | $97.16 | $132.81 | $192.47 | $235.15 | $158.65 | Purchases of Equity Securities (Q4 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Approximate Dollar Value of Shares That May Yet be Purchased Under the Plan | | :------------------------- | :------------------------------- | :--------------------------- | :----------------------------------------------------------------------------- | | October 1 – October 31, 2022 | 60 | $318.77 | $230,242,715 | | November 1 – November 30, 2022 | — | — | $230,242,715 | | December 1 – December 31, 2022 | — | — | $230,242,715 | | Total | 60 | $318.77 | | - As of February 17, 2023, $230.2 million remained available under the share repurchase program[161] Item 6. [Reserved] This item is reserved and not applicable - Not applicable[162] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations MD&A details strong 2022 performance driven by inflation and demand, a solid liquidity position, and a moderating outlook for 2023 2022 Financial Overview The company achieved significant growth in 2022 with a 17% increase in net sales and a 15% rise in net income 2022 Financial Results (Year Ended December 31) | Metric | 2022 (in millions) | 2021 (in millions) | Change (%) | | :-------------------- | :----------------- | :----------------- | :--------- | | Net sales | $6,179.7 | $5,295.6 | 17% | | Gross profit | $1,933.4 | $1,617.1 | 20% | | Gross margin | 31.3% | 30.5% | +80 bps | | Operating expenses | $907.6 | $784.3 | 16% | | Operating margin | 16.6% | 15.7% | +90 bps | | Net income | $748.5 | $650.6 | 15% | | Diluted EPS | $18.70 | $15.97 | 17% | | Adjusted Diluted EPS (excl. ASU 2016-09) | $18.43 | $15.23 | 21% | - Net sales benefited approximately 10% from inflationary product cost increases in 2022[165] - Gross margin improved due to acquisitions, increased pricing, and supply chain management, partially offset by $13.0 million in increased duties and tariffs for imported chemicals[166] - Cash provided by operations was $484.9 million in 2022, funding share repurchases ($471.2M), net working capital outflows ($342.4M), dividends ($150.6M), and capital expenditures ($43.6M)[171][273] - Inventory levels grew 19% to $1.6 billion at December 31, 2022, reflecting increased purchasing and inflation[172] - Total debt outstanding increased $203.5 million to $1.4 billion at December 31, 2022, used to fund share repurchases, dividends, and working capital[174] Current Trends and Outlook The company anticipates moderating sales in 2023 due to a decline in new pool construction, though maintenance demand remains strong - New pool construction decreased 16% in 2022 to 98,000 units and is projected to decline 15-20% in 2023, returning to 2019 levels (estimated 80,000 units)[175][179] - The company expects 2023 sales to be flat to down 3% compared to 2022, with a 4% benefit from inflationary product cost increases[179] - Non-discretionary maintenance product sales (60% of business) are expected to remain strong, while discretionary product volumes for construction and remodeling are projected to decline[176][179] - Horizon sales centers (8% of 2022 net sales) may decline 5-10% in 2023 due to new home construction sensitivity. European sales (4% of 2022 net sales) are projected to decline 10-20%[186] - 2023 gross margin is projected to be around 30.0%, in line with long-term outlook, with higher margins in H1 due to selling through pre-price increase inventory[186] - 2023 operating margin is projected at approximately 15.0% through infrastructure leverage and expense management[186] - Projected 2023 diluted EPS is $16.03 to $17.03, including an estimated $0.03 benefit from ASU 2016-09 in Q1[182] - The company plans to open about 10 new sales centers in 2023 and make selective acquisitions[177] COVID-19 Pandemic and Other Economic Trends The pandemic initially boosted demand, but recent trends show a moderation in construction as home-centric activities ease - The pandemic initially drove unprecedented demand for home-based outdoor living products, positively impacting financial performance[184] - Recent trends show moderating new construction activities as home-centric trends ease[184] - Supply chain constraints in 2021-early 2022 led to significant inventory investments, with improvements observed in Q2 2022[185] Critical Accounting Estimates The company's financial reporting relies on significant estimates for accounts receivable, inventory, vendor programs, and goodwill Allowance for Doubtful Accounts The allowance for doubtful accounts is based on historical data, customer financial health, and economic trends - An allowance for doubtful accounts is maintained based on estimated losses from uncollectible customer payments, with reserves ranging from 0.05% for current amounts to 100% for specific accounts over 60 days past due[190][191] - Estimates consider historical bad debts, receivable aging, customer financial conditions, and economic trends (housing market, consumer credit, GDP)[192] - Annual write-offs averaged approximately 0.08% of net sales over the past five years, with 0.08% in 2022, 0.06% in 2021, and 0.09% in 2020. Expected range for 2023 is 0.05% to 0.10%[193] - A 20% change in the reserve at December 31, 2022, would impact pretax income by approximately $1.9 million and diluted EPS by $0.04[195] Inventory Obsolescence The inventory obsolescence reserve is calculated based on sales velocity to ensure inventory is valued at net realizable value - The reserve for inventory obsolescence is based on inventory with lower sales velocity and no sales for the past 12 months, aiming to reflect net realizable value[197] - Reserves are 5% for lower sales velocity/no sales inventory and an additional 5% for excess lower sales velocity inventory, and 45% for excess no-sales inventory[197] - Factors considered include inventory levels relative to historical sales, customer preferences, regulatory changes, seasonal fluctuations, geographic location, and new product offerings[198] - A 20% change in the inventory reserve at December 31, 2022, would impact pretax income by approximately $4.2 million and diluted EPS by $0.08[199] Vendor Programs Benefits from vendor programs are accrued monthly and recognized as a reduction to cost of sales when products are sold - Vendor programs, offering consideration for achieving purchase volume or net cost measures, are accounted for as a reduction of product prices and inventory, then cost of sales upon product sale[200] - Benefits are accrued monthly based on estimated annual purchases and progress toward program attainment, with estimates revised throughout the year[201][205] - Adjustments tend to have a greater impact on gross margin in the fourth quarter due to seasonality and calendar-year vendor arrangements[205] Income Taxes Deferred taxes are recorded based on enacted rates, with foreign earnings expected to be indefinitely reinvested - Deferred tax assets and liabilities are recorded based on differences between financial reporting and tax basis, using enacted rates[207] - Global Intangible Low Tax Income (GILTI) on foreign earnings is recorded as period costs if incurred[208] - U.S. income taxes are not provided on undistributed foreign subsidiary earnings, as they are expected to be indefinitely reinvested[209] - Benefits from uncertain tax positions are recognized only if it's more likely than not they will withstand examination[210] Performance-Based Compensation Accrual Compensation accruals are based on achieving performance criteria like operating income and are adjusted quarterly - Compensation programs are designed to attract, motivate, reward, and retain employees, with bonuses based on objective performance criteria like operating income[212] - Annual cash performance awards focus on short-term goals, while the three-year Strategic Plan Incentive Program (SPIP) rewards senior management based on diluted EPS growth[213][214] - Accruals are based on operating income achieved relative to expected annual operating income, with adjustments made quarterly[215] Impairment of Goodwill and Other Indefinite-Lived Intangible Assets Goodwill is tested for impairment annually using discounted cash flow models, with a minor impairment recorded in 2022 - Goodwill, at $692.0 million (19% of total assets) at December 31, 2022, is tested for impairment annually (October 1st) or more frequently if indicators arise[218][219] - A goodwill impairment charge of $0.6 million was recorded in 2022 related to the closure of a Horizon reporting unit[221] - Fair value estimates for impairment tests use discounted cash flow models, relying on significant unobservable inputs like sales growth rates, operating margins, and discount rates[222][223] - One Horizon reporting unit in Texas, with $0.5 million goodwill, is considered most at risk for impairment due to marginal results[225] Results of Operations The company's financial performance is analyzed through consolidated statements and a comparison of base business versus excluded components Fiscal Year 2022 compared to Fiscal Year 2021 In 2022, net sales grew 17% and operating income rose 23%, driven by price inflation and sustained demand Consolidated Statements of Income (as % of Net Sales) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Net sales | 100.0% | 100.0% | 100.0% | | Cost of sales | 68.7% | 69.5% | 71.3% | | Gross profit | 31.3% | 30.5% | 28.7% | | Operating expenses | 14.7% | 14.8% | 16.9% | | Operating income | 16.6% | 15.7% | 11.8% | | Interest and other non-operating expenses, net | 0.7% | 0.2% | 0.3% | | Income before income taxes and equity in earnings | 15.9% | 15.6% | 11.5% | Consolidated Results: Base Business vs. Excluded Components (in thousands) | Metric (Year Ended Dec 31) | Base Business 2022 | Base Business 2021 | Excluded 2022 | Excluded 2021 | Total 2022 | Total 2021 | | :-------------------------- | :----------------- | :----------------- | :------------ | :------------ | :--------- | :--------- | | Net sales | $5,889,497 | $5,281,773 | $290,230 | $13,811 | $6,179,727 | $5,295,584 | | Gross profit | $1,804,744 | $1,613,252 | $128,668 | $3,840 | $1,933,412 | $1,617,092 | | Gross margin | 30.6% | 30.5% | 44.3% | 27.8% | 31.3% | 30.5% | | Operating expenses | $830,525 | $779,897 | $77,104 | $4,411 | $907,629 | $784,308 | | Operating income (loss) | $974,219 | $833,355 | $51,564 | $(571) | $1,025,783 | $832,784 | | Operating margin | 16.5% | 15.8% | 17.8% | (4.1)% | 16.6% | 15.7% | - Net sales increased 17% (12% from base business) in 2022, driven by elevated price inflation (approx. 10%) and sustained demand for outdoor-living products[236][237] - Sales growth was partially offset by 1% impact from European market softness, 1% unfavorable currency exchange, and less favorable weather[237] - Equipment sales for base business increased 9% (28% of net sales), building materials grew 18% (13% of net sales), and chemical sales for base business increased 32% (11% of net sales)[237] - Gross margin improved 80 basis points to 31.3% in 2022, benefiting from acquisitions, pricing, and supply chain management, despite lower vendor incentives and $13.0 million in increased duties/tariffs[244] - Operating expenses increased 16% to $907.6 million, reflecting inflationary increases and costs to support business growth, but declined as a percentage of net sales (14.7% vs 14.8%)[167][245] - Operating income increased 23% to $1.0 billion, with operating margin rising 90 basis points to 16.6%[168] - Interest and other non-operating expenses increased $32.3 million due to higher average debt levels and interest rates (weighted average effective interest rate increased to 2.8% in 2022 from 2.5% in 2021)[168][246] - Effective income tax rate was 24.0% in 2022 (21.1% in 2021), including a $10.8 million tax benefit from ASU 2016-09[169][247] Fiscal Year 2021 compared to Fiscal Year 2020 A detailed comparison of 2021 and 2020 results is available in the prior year's annual report - For a detailed discussion of 2021 vs 2020 results, refer to the 2021 Annual Report on Form 10-K[255] Seasonality and Quarterly Fluctuations Quarterly sales growth decelerated through 2022, influenced by strong early buys, weather impacts, and moderating demand - The business is seasonal, with Q2 and Q3 typically having the highest sales and net income due to peak swimming pool use and related activities[256][335] Quarterly Net Sales Growth (YoY) | Quarter | 2022 Net Sales Growth | 2022 Base Business Net Sales Growth | | :-------- | :-------------------- | :---------------------------------- | | First | 33% | 26% | | Second | 15% | 10% | | Third | 14% | 10% | | Fourth | 6% | 1% | - Q1 2022 sales benefited from strong demand and elevated price inflation (10-12%), plus accelerated customer early buys and an extra selling day[245] - Q2 2022 sales were impacted by unfavorable weather (heavy rainfall, cooler temperatures) in the Northeast U.S. and Canada, and currency fluctuations, despite healthy demand[260] - Q3 2022 sales were aided by above-average temperatures but negatively impacted by Hurricane Ian closures in Florida, with some sales shifting to Q4[245][261] - Q4 2022 sales benefited from inflationary product cost increases (8%) but were significantly impacted by unfavorable weather, particularly an Arctic blast in December[245][263] Geographic Areas All sales centers are aggregated into a single reportable segment due to operational and economic similarities - All sales centers are aggregated into a single reportable segment due to similar operations and economic characteristics[265][333] - Sales by product lines and categories are not tracked on a consolidated basis due to the number of product lines and ongoing classification changes[334] Liquidity and Capital Resources The company maintains liquidity through cash from operations and credit facilities to fund working capital, acquisitions, and shareholder returns Sources and Uses of Cash In 2022, increased cash from operations was driven by higher net income, while investing activities decreased due to fewer acquisitions Cash Flows (in thousands) | Year Ended December 31, | 2022 | 2021 | | :------------------------ | :--- | :--- | | Operating activities | $484,854 | $313,490 | | Investing activities | $(50,870) | $(849,614) | | Financing activities | $(411,658) | $526,131 | - Cash provided by operations increased $171.4 million to $484.9 million in 2022, driven by higher net income and changes in working capital[273] - Cash used in investing activities decreased $798.7 million to $50.9 million in 2022, primarily due to a decrease in acquisition payments ($802.7 million less than 2021)[274] - Cash used in financing activities was $411.7 million in 2022 (vs. $526.1 million provided in 2021), reflecting increased net debt payments ($566.7 million), share repurchases ($333.2 million), and dividends ($31.0 million)[275] Future Sources and Uses of Cash The company relies on three major credit facilities with a combined capacity exceeding $1.7 billion to fund future working capital needs - Future working capital will be sourced from operations and three major credit facilities: the Amended and Restated Revolving Credit Facility ($1.25 billion capacity), the Term Facility ($185.0 million capacity), and the Receivables Securitization Facility (up to $350.0 million capacity)[277][278][280][282] - As of December 31, 2022, the Credit Facility had $1.0 billion outstanding (weighted average effective interest rate 4.4%), the Term Facility had $157.3 million outstanding (5.5%), and the Receivables Facility had $199.5 million outstanding (5.2%)[279][281][284] Financial Covenants The company maintains compliance with its credit facility covenants, including leverage and fixed charge coverage ratios - Credit and Term Facilities include restrictive financial covenants: a maximum average total leverage ratio (less than 3.25 to 1.00) and a minimum fixed charge coverage ratio (greater than or equal to 2.25 to 1.00)[285][286] - As of December 31, 2022, the average total leverage ratio was 1.37 (vs. 0.77 in 2021), and the fixed charge ratio was 9.57 (vs. 11.76 in 2021)[285][286] - Dividends and share repurchases are permitted provided no default exists and the leverage ratio remains below 3.25 to 1.00[286] Interest Rate Swaps The company utilizes interest rate swaps to convert variable-rate debt to fixed rates, mitigating interest rate risk - The company uses interest rate swap contracts and forward-starting interest rate swap contracts to convert variable interest rates on borrowings to fixed rates, reducing exposure to fluctuations[288] - As of December 31, 2022, two interest rate swap contracts and one forward-starting swap were in place[289] Compliance and Future Availability The company was in compliance with all debt covenants as of year-end 2022 and expects to remain so in 2023 - As of December 31, 2022, the company was in compliance with all covenants and financial ratio requirements under its credit facilities and expects to remain so throughout 2023[290] Future Obligations The company has total contractual obligations of $1.7 billion, primarily consisting of long-term debt and operating leases Summary of Contractual Obligations and Commitments (in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :----------------- | :------ | :--------------- | :-------- | :-------- | :---------------- | | Long-term debt | $1,389,003 | $34,292 | $280,500 | $1,074,211 | — | | Operating leases | $299,587 | $76,764 | $120,427 | $69,952 | $32,444 | | Purchase obligations | $11,720 | $4,304 | $4,764 | $2,652 | — | | Total | $1,700,310 | $115,360 | $405,691 | $1,146,815 | $32,444 | Estimated Interest Payments Due by Period (in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :--------- | :------ | :--------------- | :-------- | :-------- | :---------------- | | Interest | $168,974 | $52,022 | $85,761 | $31,191 | — | - Unrecognized tax benefits and other non-contractual liabilities are excluded from the table due to uncertainties in timing and amount[293] Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company is primarily exposed to market risks from interest rate fluctuations and foreign currency exchange rates Interest Rate Risk The company's earnings are exposed to variable interest rate changes, a risk partially mitigated by interest rate swaps - Earnings are exposed to changes in short-term interest rates due to variable rate debt, mitigated by interest rate swap contracts[297] - A sensitivity analysis assuming a 1.0% increase in variable interest rates for uncovered debt would decrease pretax income by approximately $12.5 million and diluted EPS by $0.23 in 2022[298] - Failure of swap counterparties would result in the loss of potential benefits and continued obligation for variable interest payments[300] Currency Risk Foreign currency fluctuations may impact financial results, though the effect has not been material historically - Changes in exchange rates for functional currencies of international subsidiaries (e.g., Canadian Dollar, British Pound, Euro, Mexican Peso, Australian Dollar) may impact sales, operating expenses, and earnings[301][302] - Historically, currency fluctuations have not materially affected operating results, but could become material if changes are significant or international operations grow[301] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and the independent auditor's report Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued unqualified opinions on the financial statements and internal controls, identifying goodwill valuation as a critical audit matter - Ernst & Young LLP audited the consolidated financial statements for the period ended December 31, 2022, and expressed an unqualified opinion[307] - The firm also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[308] - The critical audit matter identified was the valuation of goodwill ($692.0 million at Dec 31, 2022), due to the complexity and judgment involved in estimating reporting unit fair values, particularly assumptions like weighted average cost of capital, revenue growth, operating margin, and terminal growth rate[313] Consolidated Statements of Income The company reported net sales of $6.2 billion and net income of $748.5 million for the year ended December 31, 2022 Consolidated Statements of Income (in thousands, except per share data) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Net sales | $6,179,727 | $5,295,584 | $3,936,623 | | Gross profit | $1,933,412 | $1,617,092 | $1,130,902 | | Operating income | $1,025,783 | $832,784 | $464,027 | | Net income | $748,462 | $650,624 | $366,738 | | Diluted EPS | $18.70 | $15.97 | $8.97 | | Cash dividends declared per common share | $3.80 | $2.98 | $2.29 | Consolidated Statements of Comprehensive Income Comprehensive income for 2022 was $761.8 million, including net income and other comprehensive income adjustments Consolidated Statements of Comprehensive Income (in thousands) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Net income | $748,462 | $650,624 | $366,738 | | Foreign currency translation adjustments | $(10,028) | $(4,663) | $5,210 | | Change in unrealized gains (losses) on interest rate swaps, net of tax | $23,407 | $11,198 | $(8,870) | | Total other comprehensive income (loss) | $13,379 | $6,535 | $(3,660) | | Comprehensive income | $761,841 | $657,159 | $363,078 | Consolidated Balance Sheets Total assets grew to $3.6 billion as of December 31, 2022, with stockholders' equity increasing to $1.2 billion Consolidated Balance Sheets (in thousands) | December 31, | 2022 | 2021 | | :------------- | :--- | :--- | | Total current assets | $2,018,991 | $1,769,085 | | Property and equipment, net | $193,709 | $179,008 | | Goodwill | $691,993 | $688,364 | | Other intangible assets, net | $305,450 | $312,814 | | Total assets | $3,565,437 | $3,230,131 | | Total current liabilities | $675,714 | $744,416 | | Long-term debt, net | $1,361,761 | $1,171,578 | | Total liabilities | $2,330,243 | $2,158,738 | | Total stockholders' equity | $1,235,194 | $1,071,393 | Consolidated Statements of Cash Flows Net cash from operating activities was $484.9 million in 2022, while financing activities used $411.7 million Consolidated Statements of Cash Flows (in thousands) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Net cash provided by operating activities | $484,854 | $313,490 | $397,581 | | Net cash used in investing activities | $(50,870) | $(849,614) | $(146,289) | | Net cash (used in) provided by financing activities | $(411,658) | $526,131 | $(244,371) | | Change in cash and cash equivalents | $21,270 | $(9,807) | $5,545 | | Cash and cash equivalents at end of year | $45,591 | $24,321 | $34,128 | Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased by $163.8 million in 2022, driven by net income offset by share repurchases and dividends - Stockholders' equity increased from $1,071,393 thousand in 2021 to $1,235,194 thousand in 2022, driven by net income, partially offset by share repurchases and cash dividends[326] - Repurchases of common stock, net of retirements, totaled $(471,229) thousand in 2022[326] - Cash dividends declared totaled $(150,624) thousand in 2022[326] Notes to Consolidated Financial Statements This section provides detailed explanations of the accounting policies and financial data presented in the consolidated statements Note 1 - Organization and Summary of Significant Accounting Policies This note outlines the company's business operations and the significant accounting policies used in preparing the financial statements - The company operates 420 sales centers across North America, Europe, and Australia, distributing swimming pool, irrigation, landscape, and hardscape products[329] - Key accounting estimates include allowance for doubtful accounts, inventory obsolescence, vendor programs, income taxes, performance-based compensation, and goodwill impairment[331] - The company aggregates all sales centers into a single reportable segment due to similar operations and economic characteristics[333] - Revenue is recognized when customers obtain control of products, with shipping and handling fees billed to customers included in net sales[336][337] - Vendor program benefits are recognized as a reduction of inventory cost until products are sold, then as a reduction of cost of sales[341] - Advertising costs were $28.8 million in 2022, significantly up from $9.4 million in 2021, primarily due to the Porpoise Pool & Patio, Inc. acquisition[346][347] - The Inflation Reduction Act of 2022 (IRA) implemented a corporate alternative minimum tax and an excise tax on stock repurchases, effective after December 31, 2022, but is not expected to materially impact results[350] - The company uses interest rate swap contracts as cash flow hedges to reduce exposure to variable interest rates[363] Allowance for Doubtful Accounts (in thousands) | Year | Balance at beginning of year | Bad debt expense | Write-offs, net of recoveries | Balance at end of year | | :--- | :--------------------------- | :--------------- | :-------------------------- | :--------------------- | | 2022 | $5,942 | $7,449 | $(3,869) | $9,522 | | 2021 | $4,808 | $3,377 | $(2,243) | $5,942 | | 2020 | $5,472 | $1,900 | $(2,564) | $4,808 | Reserve for Inventory Obsolescence (in thousands) | Year | Balance at beginning of year | Provision for inventory write-downs | Deduction for inventory write-offs | Balance at end of year | | :--- | :--------------------------- | :-------------------------------- | :------------------------------- | :--------------------- | | 2022 | $15,196 | $11,989 | $(5,977) | $21,208 | | 2021 | $11,398 | $7,781 | $(3,983) | $15,196 | | 2020 | $9,036 | $6,181 | $(3,819) | $11,398 | Depreciation Expense (in thousands) | Year | Amount | | :--- | :----- | | 2022 | $30,381 | | 2021 | $28,287 | | 2020 | $27,967 | Accumulated Other Comprehensive Income (Loss) (in thousands) | December 31, | 2022 | 2021 | | :------------- | :--- | :--- | | Foreign currency translation adjustments | $(19,608) | $(9,580) | | Unrealized gains on interest rate swaps, net of tax | $25,503 | $2,096 | | Total | $5,895 | $(7,484) | Cash Paid for Interest and Income Taxes (in thousands) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Interest | $39,759 | $10,023 | $8,257 | | Income taxes, net of refunds | $314,714 | $83,953 | $81,792 | Note 2 - Acquisitions This note details the company's acquisition activities, including the significant purchase of Porpoise Pool & Patio, Inc. in 2021 - In April 2022, the company acquired Tri-State Pool Distributors, adding one location in West Virginia[391] - In December 2021, the company acquired Porpoise Pool & Patio, Inc. for $788.7 million, recognizing $403.5 million in goodwill and $301.0 million in other intangible assets[392] - Other 2021 acquisitions included Wingate Supply, Inc. (irrigation/landscape products) and Vak Pak Builders Supply, Inc. and Pool Source, LLC (swimming pool products), each adding one location in Florida or Tennessee[393][394] - 2020 acquisitions included Master Tile Network LLC (tile/hardscape), Northeastern Swimming Pool Distributors, Inc. (Canada), Jet Line Products, Inc. (multiple locations), and TWC Distributors, Inc. (Florida/Georgia)[395][396][397] Note 3 - Goodwill and Other Intangible Assets This note provides details on the carrying amounts of goodwill and other intangible assets, including impairment charges Changes in Goodwill Carrying Amount (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 | - The acquisition of Porpoise Pool & Patio, Inc. in 2021 resulted in $403.5 million in goodwill and $301.0 million in other intangible assets, including the indefinite-lived Pinch A Penny brand name ($169.0 million)[399][400] - Goodwill impairment of $0.6 million was recorded in October 2022 due to the closure of a Horizon reporting unit[402] - In 2020, impairment of $3.5 million goodwill and $0.9 million intangibles was recorded for Australian reporting units due to COVID-19 impacts[404] Other Intangible Assets (in thousands) | Intangible Asset | 2022 Gross | 2022 Accumulated Amortization | 2022 Net | 2021 Gross | 2021 Accumulated Amortization | 2021 Net | Weighted Average Useful Life (Years) | | :----------------- | :--------- | :---------------------------- | :------- | :--------- | :---------------------------- | :------- | :--------------------------------- | | 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 | | NPT tradename | $1,500 | $(1,112) | $388 | $1,500 | $(1,037) | $463 | 20 | | Non-compete agreements | $6,022 | $(2,533) | $3,489 | $8,096 | $(3,891) | $4,205 | 4.58 | | Customer relationships | $109,000 | $(5,677) | $103,323 | $109,000 | $(214) | $108,786 | 20 | | Franchise agreements | $22,000 | $(1,150) | $20,850 | $22,000 | $(40) | $21,960 | 20 | | Total other intangibles | $315,922 | $(10,472) | $305,450 | $317,996 | $(5,182) | $312,814 | | Estimated Amortization Expense for Other Intangible Assets (in thousands) | Year | Amount | | :--- | :----- | | 2023 | $7,908 | | 2024 | $7,602 | | 2025 | $7,441 | | 2026 | $7,013 | | 2027 | $6,660 | Note 4 - Details of Certain Balance Sheet Accounts This note provides a detailed breakdown of receivables, property and equipment, and accrued expenses Receivables, net (in thousands) | December 31, | 2022 | 2021 | | :------------- | :--- | :--- | | Trade accounts | $32,793 | $27,724 | | Vendor programs | $101,554 | $129,072 | | Other, net | $3,422 | $4,405 | | Total receivables | $137,769 | $161,201 | | Less: Allowance for doubtful accounts | $(9,522) | $(5,942) | | Receivables, net | $128,247 | $155,259 | Property and Equipment, net (in thousands) | December 31, | 2022 | 2021 | | :------------- | :--- | :--- | | Total property and equipment | $405,222 | $370,251 | | Less: Accumulated depreciation | $(211,513) | $(191,243) | | Property and equipment, net | $193,709 | $179,008 | Accrued Expenses and Other Current Liabilities (in thousands) | December 31, | 2022 | 2021 | | :------------- | :--- | :--- | | Salaries and payroll deductions | $22,318 | $25,882 | | Performance-based compensation | $70,609 | $76,255 | | Taxes payable | $16,479 | $106,894 | | Other current liabilities | $59,115 | $55,846 | | Total | $168,521 | $264,877 | Note 5 - Debt This note details the components of the company's $1.4 billion in total debt and its various credit facilities Components of Debt (in thousands) | December 31, | 2022 | 2021 | | :------------- | :--- | :--- | | Short-term borrowings and current portion of long-term debt | $25,042 | $11,772 | | Long-term debt, net | $1,361,761 | $1,171,578 | | Total debt | $1,386,803 | $1,183,350 | - The Credit Facility's total borrowing capacity increased to $1.25 billion in December 2021, including a $750.0 million revolving credit facility and a $500.0 million term loan facility, maturing September 25, 2026[413][415] - As of December 31, 2022, $1.0 billion was outstanding under the Credit Facility, with $225.5 million available for borrowing[417] - The Term Facility provides $185.0 million in borrowing capacity, maturing December 30, 2026, with $157.3 million outstanding at December 31, 2022[420][423] - The Receivables Securitization Facility allows borrowing up to $350.0 million (April-August) and $210.0-$340.0 million (other months), maturing November 1, 2024, with $199.5 million outstanding at December 31, 2022[425][428] Maturities of Long-Term Debt (in thousands) | Year | Amount | | :--- | :----- | | 2023 | $34,292 | | 2024 | $233,750 | | 2025 | $46,750 | | 2026 | $1,074,211 | | 2027 | — | - The company had two interest rate swap contracts in place as of December 31, 2022, and one forward-starting interest rate swap contract, converting variable interest rates to fixed rates[433] - As of December 31, 2022, the company was in compliance with all financial covenants[438] Note 6 - Share-Based Compensation This note describes the company's share-based compensation plans, including stock options, restricted stock, and an employee stock purchase plan - The Amended 2007 Long-Term Incentive Plan (LTIP) authorizes non-qualified stock options and restricted stock awards, with 4,015,569 shares available for future issuance as of December 31, 2022[440] - Stock options and restricted stock awards generally vest over three to five years, with restricted stock awards also having performance-based criteria[441][442] Stock Option Activity (Year Ended December 31, 2022) | Metric | Shares | Weighted Average Exercise Price | | :-------------------------- | :------- | :------------------------------ | | Balance at December 31, 2021 | 651,617 | $123.98 | | Granted | 75,202 | $371.80 | | Exercised | 71,737 | $87.09 | | Forfeited | 12,157 | $260.53 | | Balance at December 31, 2022 | 642,925 | $154.57 | Stock Option Grant Date Fair Value Assumptions (Weighted Average) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Expected volatility | 28.9% | 27.0% | 20.7% | | Expected term (years) | 7.1 | 6.9 | 6.8 | | Risk-free interest rate | 2.92% | 1.00% | 1.22% | | Expected dividend yield | 1.15% | 1.15% | 1.30% | | Grant date fair value | $116.56 | $83.05 | $42.52 | Share-Based Compensation Expense for Stock Option Awards (in thousands) | Year | Amount | | :--- | :----- | | 2022 | $3,413 | | 2021 | $2,846 | | 2020 | $2,842 | Restricted Stock Award Activity (Year Ended December 31, 2022) | Metric | Shares | Weighted Average Grant Date Fair Value | | :-------------------------- | :------- | :------------------------------------- | | Balance unvested at Dec 31, 2021 | 260,738 | $190.26 | | Granted | 53,926 | $393.64 | | Vested | 78,931 | $137.60 | | Forfeited | 23,016 | $273.55 | | Balance unvested at Dec 31, 2022 | 212,717 | $256.97 | Share-Based Compensation Expense for Restricted Stock Awards (in thousands) | Year | Amount | | :--- | :----- | | 2022 | $11,024 | | 2021 | $11,543 | | 2020 | $10,965 | - Under the Employee Stock Purchase Plan (ESPP), employees can purchase stock at 85% of the lower of the closing price at period end or the average of beginning and ending closing prices[450][453] - ESPP share-based compensation expense was $0.5 million in 2022, $0.8 million in 2021, and $0.7 million in 2020[451] Note 7 - Income Taxes This note details the components of the income tax provision and reconciles the statutory federal rate to the effective tax rate Income Before Income Taxes and Equity in Earnings by Jurisdiction (in thousands) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | United States | $919,461 | $752,957 | $428,857 | | Foreign | $65,411 | $71,188 | $22,817 | | Total | $984,872 | $824,145 | $451,674 | Provision for Income Taxes (in thousands) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Total current provision for income taxes | $221,594 | $169,162 | $87,773 | | Total deferred provision for income taxes | $15,169 | $4,650 | $(2,542) | | Provision for income taxes | $236,763 | $173,812 | $85,231 | Reconciliation of U.S. Federal Statutory Tax Rate to Effective Tax Rate | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Federal statutory rate | 21.00% | 21.00% | 21.00% | | Stock-based compensation | (1.09)% | (3.67)% | (6.34)% | | Other, primarily state income tax rate | 4.15% | 3.87% | 4.43% | | Total effective tax rate | 24.04% | 21.09% | 18.87% | - Excess tax benefits from stock-based compensation were $10.8 million in 2022, $30.0 million in 2021, and $28.6 million in 2020[454] Deferred Tax Assets and Liabilities (in thousands) | December 31, | 2022 | 2021 | | :------------- | :--- | :--- | | Total deferred tax assets | $978 | $1,096 | | Total deferred tax liabilities | $58,759 | $35,840 | | Net deferred tax liability | $57,781 | $34,744 | - Unrecognized tax benefits that would decrease the effective tax rate were $12.2 million at December 31, 2022, and $10.5 million at December 31, 2021[458] Note 8 - Earnings Per Share This note provides the computation of basic and diluted earnings per share using the two-class method - Basic and diluted earnings per share are calculated using the two-class method, with share-based payment awards considered participating securities[463] Computation of Earnings Per Share (in thousands, except per share data) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Net income attributable to common stockholders | $744,311 | $646,303 | $366,738 | | Basic weighted average common shares outstanding | 39,409 | 39,876 | 40,106 | | Diluted weighted average common shares outstanding | 39,806 | 40,480 | 40,865 | | Basic EPS | $18.89 | $16.21 | $9.14 | | Diluted EPS | $18.70 | $15.97 | $8.97 | Note 9 - Commitments and Contingencies This note outlines the company's operating lease commitments and states that current litigation is not expected to be material - The company leases facilities under operating leases expiring through 2036, with renewal options generally n