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Item 2. Management’s Discussion and Analysis

2024-07-30 compared with 2024-04-29 · 159 added, 109 removed, 220 unchanged (55% of the section changed)

18 unchanged sentences

Financial Results

Net sales decreased 7% in the first quarter of 2024 to $1.1 billion compared to $1.2 billion in the first quarter of 2023 following significant growth in 2021 and 2022.

Net sales decreased 5% in the second quarter of 2024 to $1.8 billion compared to $1.9 billion in the second quarter of 2023.

Base business results approximated consolidated results for the period.

Maintenance activities were stable during the quarter, indicating steady demand for non-discretionary products, while pool construction and discretionary activities were weaker.

Inflationary product cost increases moderated and net sales benefited approximately 2% compared to a benefit of 4% to 5% in the first quarter of 2023.

Gross profit decreased 8% to $338.6 million in the first quarter of 2024 from $369.8 million in the same period of 2023.

Gross margin decreased 40 basis points to 30.2% in the first quarter of 2024 compared to 30.6% in the first quarter of 2023.

In the first quarter of 2024, our gross margin was impacted by the following factors.

• Gross margin in the first quarter of 2024 included a benefit of $12.6 million, or 110 basis points, related to a reduction of estimated import taxes previously recorded in the fourth quarter of 2022.

• Gross margin benefited from ongoing supply chain management initiatives.

• We realized a higher cost of product in the first quarter of 2024 compared to the first quarter of 2023.

In 2023, we started the year carrying a large amount of lower cost strategically-purchased inventory and successfully reduced this excess inventory to normalized levels by the end of the 2023 season.

The lower-cost inventory was more impactful on gross margin in the first quarter of 2023 when a higher portion was sold relative to the full year.

• Changes in product mix weighed on our gross margin;

we expect this mix to shift as sales of higher margin products increase as the season progresses.

• Greater customer preseason early buys during the quarter compared to last year and a higher concentration of sales to larger customers negatively impacted our margin.

Selling and administrative expenses (operating expenses) increased 3% to $229.8 million in the first quarter of 2024 compared to $224.0 million in the first quarter of 2023.

While we managed variable costs in line with lower sales volumes, expense growth drivers included rent and facility costs, inflationary wage increases, insurance costs, technology initiatives and investments in greenfield locations.

As a percentage of net sales, operating expenses increased to 20.5% in the first quarter of 2024 compared to 18.6% in the same period of 2023.

Operating income in the first quarter of 2024 decreased 25% to $108.7 million from $145.8 million in 2023.

Operating margin was 9.7% in the first quarter of 2024 compared to 12.1% in the first quarter of 2023.

Interest and other non-operating expenses, net for the first quarter of 2024 decreased $2.4 million compared to the first quarter of 2023, primarily due to a decrease in average debt between periods.

We recorded a $7.4 million tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting , in the quarter ended March 31, 2024, compared to a tax benefit of $4.8 million realized in the same period of 2023.

This resulted in a $0.19 per diluted share tax benefit in the first quarter of 2024 compared to a $0.12 per diluted share tax benefit realized in the same period of 2023.

Net income decreased 22% to $78.9 million in the first quarter of 2024 compared to $101.7 million in the first quarter of 2023.

Earnings per diluted share decreased 21% to $2.04 in the first quarter of 2024 compared to $2.58 in the same period of 2023.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share decreased 25% to $1.85 compared to $2.46 in the first quarter of 2023.

Sales of recurring maintenance products, such as chemicals, parts and repair items, continued to perform well.

Lower spending on discretionary products used in remodeling and new pool construction reflected consumer hesitancy.

We saw an overall net 1% positive pricing impact on sales with sales benefiting from an approximately 2% to 3% realization on product cost increases for equipment, offset by lower realized net price on other products and some commodity pricing headwinds.

Gross profit decreased 7% to $530.1 million in the second quarter of 2024 from $567.8 million in the same period of 2023.

Gross margin of 30.0% decreased 60 basis points compared to 30.6% in the second quarter of 2023 as our prior year gross margin benefited from sales of a larger amount of lower cost strategically-purchased inventory.

Our current year gross margin also reflected product mix impacts, including lower sales of higher margin building materials.

Selling and administrative expenses (operating expenses) increased 7% to $258.7 million in the second quarter of 2024 compared to $240.8 million in the second quarter of 2023.

In the second quarter, we increased spend due to the expansion of our network and our technology initiatives.

We expect that year-over-year comparative expense increases will moderate in the third and fourth quarters of 2024.

Through July, we have completed eight of our ten projected new sales center openings and have made significant headway with our technology tools.

As a percentage of net sales, operating expenses increased to 14.6% in the second quarter of 2024 compared to 13.0% in the same period of 2023.

Operating income in the second quarter of 2024 decreased 17% to $271.5 million from $327.0 million in 2023.

Operating margin was 15.3% in the second quarter of 2024 compared to 17.6% in the second quarter of 2023.

Interest and other non-operating expenses, net for the second quarter of 2024 decreased $2.8 million compared to the second quarter of 2023, primarily due to a decrease in average debt between periods.

We recorded a $0.4 million tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting , in the quarter ended June 30, 2024, compared to a tax benefit of $0.6 million realized in the same period of 2023.

This resulted in a $0.01 per diluted share tax benefit in the second quarter of 2024 compared to a $0.02 per diluted share tax benefit realized in the same period of 2023.

Net income decreased 17% to $192.4 million in the second quarter of 2024 compared to $232.3 million in the second quarter of 2023.

Earnings per diluted share decreased 16% to $4.99 in the second quarter of 2024 compared to $5.91 in the same period of 2023.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share decreased 15% to $4.98 compared to $5.89 in the second quarter of 2023.

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

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Financial Position and Liquidity

Total net receivables, including pledged receivables, trended in line with net sales activity at March 31, 2024 compared to March 31, 2023.

Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 26.9 days at March 31, 2024 and 26.5 days at March 31, 2023.

Our allowance for doubtful accounts balance was $9.3 million at March 31, 2024 and $9.0 million at March 31, 2023.

We reduced net inventory levels compared to March 31, 2023 by $189.7 million, or 11%, to $1.5 billion, consistent with the trends stemming from our inventory management efforts executed over the 2023 swimming pool season following strategic buys in prior years.

Our inventory reserve was $24.2 million at March 31, 2024 and $24.5 million at March 31, 2023.

Our inventory turns, as calculated on a trailing four quarters basis, were 2.7 times at March 31, 2024 and 2.5 times at March 31, 2023.

Total debt outstanding was $979.2 million at March 31, 2024, down $386.6 million from March 31, 2023, as we have used operating cash flows to reduce our debt over the past year.

Total net receivables, including pledged receivables, trended in line with net sales activity at June 30, 2024 compared to June 30, 2023.

Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 26.8 days at June 30, 2024 and 26.2 days at June 30, 2023.

Our allowance for doubtful accounts balance was $9.4 million at June 30, 2024 and $10.1 million at June 30, 2023.

Our inventory management efforts executed over the first half of the year reduced our inventory levels compared to June 30, 2023 by $97.3 million, or 7%, to $1.3 billion.

Our inventory reserve was $25.0 million at June 30, 2024 and $25.4 million at June 30, 2023.

Our inventory turns, as calculated on a trailing four quarters basis, were 2.7 times at June 30, 2024 and 2.5 times at June 30, 2023.

Total debt outstanding was $1.1 billion at June 30, 2024, down $68.0 million from June 30, 2023, as we have used a portion of operating cash flows to reduce our debt over the past year.

For additional information, see "Liquidity and Capital Resources" below.

Current Trends and Outlook

For a detailed discussion of trends impacting us through 2023, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2023 Annual Report on Form 10-K.

We expect sales for the full year of 2024 to be flat to slightly positive compared to 2023, impacted by the following factors and assumptions:

• normal weather patterns for the remainder of 2024;

We expect sales for the full year of 2024 to be down around 6% compared to 2023, impacted by the following factors and assumptions:

• volumes of discretionary products used for swimming pool construction to decline 15% to 20%;

• volumes of products used in the remodeling, renovation and upgrading of swimming pools to decline as much as 15%;

• sustained demand for pool maintenance products;

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

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

• inflationary product cost increases of approximately 1% to 2%.

As previously disclosed in our 2023 Annual Report on Form 10-K, we project gross margin for the full year of 2024 to be in line with our long-term outlook of approximately 30.0%, with our highest margin in the second quarter of the year.

As previously disclosed in our 2023 Annual Report on Form 10-K, we project gross margin for the full year of 2024 to be in line with our long-term outlook of approximately 30.0%.

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

We expect to leverage our existing infrastructure and manage discretionary spending to maintain expenses for the full year of 2024 in line with sales expectations to achieve an operating margin of approximately 13.0%.

We project that our annual effective tax rate (without the benefit from ASU 2016-09) for 2024 will approximate 25.3%.

expect our effective tax rate will fluctuate from quarter to quarter due to ASU 2016-09, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse.

We recorded a $7.4 million, or $0.19 per diluted share, tax benefit from ASU 2016-09 for the three months ended March 31, 2024.

We may recognize additional tax benefits related to stock option exercises in 2024 from grants that expire in future years.

We have not included any expected tax benefits in our full year guidance beyond what we have recognized as of March 31, 2024.

We expect to leverage our existing infrastructure and manage discretionary spending to mitigate inflationary impacts while continuing to invest in our business.

For the full year of 2024, we expect to achieve an operating margin of approximately 12.0%.

We project that our annual effective tax rate (without the benefit from ASU 2016-09) for 2024 will be around 25.0%.

We expect our effective tax rate will fluctuate from quarter to quarter due to ASU 2016-09, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse.

We recorded a $7.8 million, or $0.20 per diluted share, tax benefit from ASU 2016-09 for the six months ended June 30, 2024.

We may recognize additional

tax benefits related to stock option exercises in 2024 from grants that expire in future years.

We have not included any expected tax benefits in our full year guidance beyond what we have recognized as of June 30, 2024.

We expect 2024 diluted EPS in the range of $11.05 to $11.45, including the impact of year-to-date tax benefits of $0.20.

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RESULTS OF OPERATIONS

As of March 31, 2024, we conducted operations through 442 sales centers in North America, Europe and Australia.

For the three months ended March 31, 2024, approximately 95% of our net sales were from our operations in North America.

As of June 30, 2024, we conducted operations through 445 sales centers in North America, Europe and Australia.

For the six months ended June 30, 2024, approximately 95% of our net sales were from our operations in North America.

The following table presents information derived from the Consolidated Statements of Income expressed as a percentage of net sales:

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2024 2023 2024 2023

Net sales 100.0 % 100.0 % 100.0 % 100.0 %

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We have included the results of operations from acquisitions in 2024 and 2023 in our consolidated results since the acquisition dates.

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

Base Business

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

We have not provided separate base business income statements within this Form 10-Q as our base business results for the quarter ended March 31, 2024 closely approximated consolidated results for the same period, and acquisitions and sales centers excluded from base business contributed less than 1% to the change in net sales.

The table below summarizes the changes in our sales center count during the first three months of 2024:

We have not provided separate base business income statements within this Form 10-Q as our base business results for the three and six months ended June 30, 2024 closely approximated consolidated results for the same period.

Acquired and new market sales centers excluded from base business contributed less than 1% to the change in net sales.

The table below summarizes the changes in our sales center count during the first six months of 2024:

December 31, 2023 439

Acquired location 1

Acquired locations 2

New locations 6

Consolidated location (1)

March 31, 2024 442

Consolidated locations (2)

June 30, 2024 445

Three Months Ended

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Net sales $ 1,769.8 $ 1,857.4 $ (87.6) (5)%

Net sales of $1.1 billion in the first quarter of 2024 decreased 7% compared to $1.2 billion in the first quarter of 2023, reflecting challenges from current macroeconomic conditions and mixed weather.

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

Maintenance activities were stable during the quarter, indicating steady demand for non-discretionary products, while pool construction and discretionary activities were weaker.

Net sales of $1.8 billion in the second quarter of 2024 decreased 5% compared to $1.9 billion in the second quarter of 2023.

During the second quarter, recurring maintenance product sales performed well, while spending for larger semi-discretionary products and on new pool construction and renovation projects reflected consumer hesitancy for high dollar discretionary products.

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

• Our net sales were negatively impacted by lower sales volumes from reduced pool construction activity and discretionary activity (see discussion below).

• We estimate that unfavorable weather conditions negatively impacted sales by approximately 2%.

• Net sales benefited approximately 1% to 2% from inflationary product cost increases, which is net of price deflation for some products, primarily chemical sanitizers and PVC pipe.

This compares to a benefit of 4% to 5% in the first quarter of 2023.

• Sales included a greater concentration of customer early buy activity in the first quarter of 2024 than the first quarter of 2023.

In the first quarter of 2024, sales of equipment, which is used in maintenance, renovation and new construction activities and includes swimming pool heaters, pumps, lights, filters and automation, decreased 3% compared to the same period last year, and collectively represented approximately 34% of net sales for the period.

Sales of building materials, which is primarily used in new construction and remodeling, decreased 11% compared to the first quarter of 2023 and represented approximately 13% of net sales in the first quarter of 2024.

• Maintenance-related revenues have remained stable as evidenced by volume growth in chemicals, representing 15% of our net sales.

Sales of chemicals increased 1% from the second quarter of 2023.

• Net sales were negatively impacted by lower sales volumes resulting from reduced pool construction and discretionary activities (see discussion below).

• Net sales benefited approximately 1% from inflationary product cost increases, which is net of price deflation for some products, primarily chemical sanitizers and commodity-based products like PVC pipe.

This compares to a benefit of 3% to 4% in the second quarter of 2023.

In the second quarter of 2024, sales of equipment, which is used in maintenance, renovation and new construction activities and includes swimming pool heaters, pumps, lights, filters and automation, were flat compared to the same period of last year, and collectively represented approximately 29% of net sales for the period.

Sales of building materials, which are primarily used in new construction and remodeling, decreased 10% compared to the second quarter of 2023 and represented approximately 12% of net sales in the second quarter of 2024.

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

Sales to retail customers decreased 4% in the first quarter of 2024 compared to the first quarter of 2023 and represented approximately 15% of our total net sales.

Sales to commercial swimming pool customers were flat in the first quarter of 2024 compared to the first quarter of 2023 and represented approximately 5% of our net sales for the first quarter of 2024.

Sales to retail customers decreased 6% in the second quarter of 2024 compared to the second quarter of 2023 and represented approximately 15% of our total net sales.

Sales to commercial swimming pool customers increased 16% in the second quarter of 2024 compared to the second quarter of 2023 and represented approximately 5% of our net sales for the second quarter of 2024.

Three Months Ended

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Gross margin 30.0 % 30.6 %

Gross margin decreased 40 basis points to 30.2% in the first quarter of 2024 compared to 30.6% in the first quarter of 2023.

In the first quarter of 2024, our gross margin was impacted by the following factors.

• Gross margin benefited from ongoing supply chain management initiatives.

• We realized a higher cost of product in the first quarter of 2024 compared to the first quarter of 2023.

In 2023, we started the year carrying a large amount of lower cost strategically-purchased inventory and successfully reduced this excess inventory to normalized levels by the end of the 2023 season.

The lower-cost inventory was more impactful on gross margin in the first quarter of 2023 when a higher portion was sold relative to the full year.

• Changes in product mix weighed on our gross margin;

we expect this mix to shift as sales of higher margin products increase as the season progresses.

• Greater customer preseason early buys during the quarter compared to last year and a higher concentration of sales to larger customers negatively impacted our margin.

Gross margin decreased 60 basis points to 30.0% in the second quarter of 2024 compared to 30.6% in the second quarter of 2023.

Our prior year gross margin benefited from a larger amount of lower cost strategically-purchased inventory, while our current year gross margin was negatively impacted by changes in product mix between periods, including lower sales of higher margin building materials as discussed above.

These impacts were partially offset by benefits from higher incentives earned under our vendor programs compared to the second quarter of 2023 when we were focused on inventory destocking.

Operating Expenses

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Operating expenses as a % of net sales 14.6 % 13.0 %

Operating expenses increased 3% in the first quarter of 2024 compared to the first quarter of 2023.

Operating expenses increased 7% in the second quarter of 2024 compared to the second quarter of 2023.

Expense growth drivers included cost inflation, particularly on base wages, healthcare costs and rent and facility costs.

We also increased investment spend to drive future growth through the expansion of our network and our technology initiatives.

These increases were partially offset by lower variable costs, including performance-based compensation.

As a percentage of net sales, operating expenses increased to 14.6% in the second quarter of 2024 compared to 13.0% in the same period of 2023.

Interest and Other Non-Operating Expenses, Net

Our weighted average effective interest rate increased to 5.3% in the second quarter of 2024 from 5.2% in the second quarter of 2023 on average outstanding debt of $1.0 billion and $1.3 billion for the respective periods.

Our effective income tax rate was 25.3% for the three months ended June 30, 2024, compared to 25.1% for the three months ended June 30, 2023.

We recorded a $ 0.4 million tax benefit from ASU 2016-09 in the quarter ended June 30, 2024, compared to a tax benefit of $ 0.6 million realized in the same period last year.

Without the benefit from ASU 2016-09 in both periods, our effective tax rate was 25.4% for the second quarter of 2024 and 25.4% for the second quarter of 2023.

Net Income and Earnings Per Share

Net income decreased 17% to $192.4 million in the second quarter of 2024 compared to $232.3 million in the second quarter of 2023.

Earnings per diluted share decreased 16% to $4.99 in the second quarter of 2024 compared to $5.91 in the same period of 2023.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share decreased 15% to $4.98 in the second quarter of 2024 compared to $5.89 in the second quarter of 2023.

See the reconciliation of GAAP to non-GAAP measures below.

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

Six Months Ended

(in millions) 2024 2023 Change

Net sales $ 2,890.6 $ 3,064.1 $ (173.5) (6)%

Net sales for the first six months of 2024 decreased 6% compared to the same period last year.

In the first half of 2024, maintenance activities were stable, indicating steady demand for non-discretionary products, while pool construction and discretionary activities were weaker, impacted from current macroeconomic conditions.

The first quarter of 2024 also reflected challenges from mixed weather, while the second quarter reflected a sequential improvement.

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

• Maintenance-related revenues showed stability through the first part of the season as evidenced by volume growth in chemicals, representing 14% of our net sales.

Sales of chemicals were flat compared to the first half of 2023.

• Net sales were negatively impacted by lower sales volumes resulting from reduced pool construction and discretionary activities (see discussion below).

• Net sales benefited approximately 1% to 2% from inflationary product cost increases, which is net of price deflation for some products, primarily chemical sanitizers and commodity-based products like PVC pipe.

This compares to a benefit of 4% in the first six months of 2023.

• We estimate that unfavorable weather conditions negatively impacted sales by approximately 1%, primarily in the first quarter.

In the first six months of 2024, sales of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, decreased approximately 1% compared to the same period last year and collectively represented 31% of net sales in the first six months of 2024.

Sales of building materials, which are primarily used in new pool construction and remodeling, decreased 10% compared to the first six months of 2023 and represented approximately 12% of net sales in the first six months of 2024.

Sales to retail customers decreased 6% in the first six months of 2024 compared to the first six months of 2023 and represented approximately 15% of our consolidated net sales.

As consumers take advantage of summer travel and recreational opportunities, sales to commercial customers increased 9% in the first six months of 2024 compared to the first six months of 2023 and represented approximately 5% of our consolidated net sales in the first six months of 2024.

Six Months Ended

(in millions) 2024 2023 Change

Gross profit $ 868.7 $ 937.5 $ (68.8) (7)%

Gross margin 30.1 % 30.6 %

Gross margin declined 50 basis points to 30.1% in the six months ended June 30, 2024, compared to 30.6% in the first six months of 2023.

In the first half of 2024, our gross margin was impacted by the following factors.

• In 2023, we started the year carrying a large amount of lower cost strategically-purchased inventory and successfully reduced this excess inventory to normalized levels by the end of the 2023 season resulting in a lower gross margin in 2024.

• Gross margin in the first half of 2024 was impacted by a less advantageous product and customer mix with higher margin building materials making up a smaller portion of our sales and larger customers taking on more of the available projects.

• Our gross margin in the first half of 2024 benefited from higher levels of incentives earned due to increased purchasing as compared to the prior year when we were actively reducing inventory levels.

• Gross margin in the first half of 2024 included a benefit of $12.6 million, or 40 basis points, related to a reduction of estimated import taxes previously recorded in the fourth quarter of 2022.

Operating Expenses

Six Months Ended

(in millions) 2024 2023 Change

Selling and administrative expenses $ 488.5 $ 464.8 $ 23.7 5%

Operating expenses as a % of net sales 16.9 % 15.2 %

Operating expenses for the six months ended June 30, 2024 were up 5% compared to the prior year period.

Expense growth drivers included rent and facility costs, inflationary wage increases, insurance costs, technology initiatives and investments in greenfield locations.

These increases were partially offset by lower variable costs, including performance-based compensation and freight costs.

As a percentage of net sales, operating expenses increased to 20.5% in the first quarter of 2024 compared to 18.6% in the same period of 2023 .

These increases were partially offset by lower variable costs, including performance-based compensation.

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the first quarter of 2024 decreased $2.4 million compared to the first quarter of 2023, primarily due to a decrease in average debt between periods.

Our weighted average effective interest rate increased to 5.3% in the first quarter of 2024 from 4.8% in the first quarter of 2023 on average outstanding debt of $1.0 billion and $1.3 billion for the respective periods.

Our effective income tax rate was 17.3% for the three months ended March 31, 2024, compared to 21.8% for the three months ended March 31, 2023.

We recorded a $ 7.4 million tax benefit from ASU 2016-09 in the quarter ended March 31, 2024, compared to a tax benefit of $ 4.8 million realized in the same period last year.

Without the benefit from ASU 2016-09 in both periods, our effective tax rate was 25.1% for the first quarter of 2024 and 25.5% for the first quarter of 2023.

Interest and other non-operating expenses, net for the first six months of 2024 decreased $5.3 million compared to the same period last year, as a decrease in average debt between periods more than offset higher average interest rates.

Our weighted average effective interest rate increased to 5.3% from 5.0% for the respective periods on average outstanding debt of $1.0 billion for the first six months of 2024 versus $1.3 billion for the same period of 2023.

Our effective income tax rate was 23.1% for the six months ended June 30, 2024, compared to 24.1% for the six months ended June 30, 2023.

We recorded a $7.8 million, or $0.20 per diluted share, tax benefit from ASU 2016-09 in the six months ended June 30, 2024, compared to a $5.4 million, or $0.14 per diluted share, tax benefit in the same period of 2023.

Without the benefits from ASU 2016-09, our effective tax rate was 25.3% for the six months ended June 30, 2024, and 25.4% for the six months ended June 30, 2023.

Net Income and Earnings Per Share

Net income decreased 22% to $78.9 million in the first quarter of 2024 compared to $101.7 million in the first quarter of 2023.

Earnings per diluted share decreased 21% to $2.04 in the first quarter of 2024 compared to $2.58 in the same period of 2023.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share decreased 25% to $1.85 in the first quarter of 2024 compared to $2.46 in the first quarter of 2023.

Net income decreased 19% to $271.3 million for the six months ended June 30, 2024, compared to $333.9 million for the six months ended June 30, 2023.

Earnings per diluted share decreased 17% to $7.03 for the six months ended June 30, 2024, versus $8.48 per diluted share for the six months ended June 30, 2023.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share decreased 18% to $6.83 for the six months ended June 30, 2024, compared to $8.34 for the six months ended June 30, 2023.

See the reconciliation of GAAP to non-GAAP measures below.

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

(Unaudited) Three Months Ended

(Unaudited) Three Months Ended Six Months Ended

June 30, June 30,

2024 2023 2024 2023

Diluted EPS $ 4.99 $ 5.91 $ 7.03 $ 8.48

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(in thousands) 2024 2023 2022

First Fourth Third Second First Fourth Third Second

Second First Fourth Third Second First Fourth Third

Statement of Income Data

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Weather Impacts on 2024 and 2023 Results

The second quarter of 2024 was marked by precipitation variability across the U.S.

with wetter conditions in the central U.S.

and Texas and below average precipitation in the western U.S.

Maintenance activities benefited from warmer-than-average temperatures across most regions, particularly in June.

Overall, mixed weather conditions led to varied impacts across our markets.

In contrast, weather conditions in the second quarter of 2023 unfavorably impacted sales due to cooler temperatures across the West through the mid-Atlantic region and the impact of wildfires in Canada.

The first quarter of 2024 was the tenth wettest quarter on record leading to mixed impacts across our markets, particularly in the month of March, which is seasonally our highest sales month of the first quarter.

However, we also observed above-average temperatures during the quarter contributing positively to economic activities in many regions, such as improvement in California during March.

The adverse effects of cooler and wetter weather in Florida and the Southeast compared to the first quarter of last year and excessive precipitation in Texas and the Northeast outweighed the positives, resulting in an unfavorable impact on net sales.

In the first quarter of 2023, varied weather conditions had a more pronounced unfavorable impact on net sales due to unusually wet and cold weather in the western U.S., particularly California and Arizona.

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

This wet and cold weather was partially offset by generally favorable conditions in our southern markets, where sales benefited from warmer weather and below-average precipitation.

CRITICAL ACCOUNTING ESTIMATES

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• the ability to attract long-term capital with satisfactory terms.

Our primary capital needs are seasonal working capital obligations, debt repayment obligations and other general corporate initiatives, including acquisitions, opening new sales centers, dividend payments and share repurchases.

Our primary working capital obligations are for the purchase of inventory, payroll, rent, other facility costs and selling and administrative expenses.

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

Based on management’s current plans, we project capital expenditures for 2024 will be 1.0% to 1.5% of net sales.

Based on management’s current plans, we project capital expenditures for 2024 will be approximately 1.0% to 1.5% of net sales.

Sources and Uses of Cash

The following table summarizes our cash flows (in thousands):

Three Months Ended

Operating activities $ 145,442 $ 103,203

Investing activities (18,952) (17,560)

Financing activities (124,162) (105,518)

Net cash provided by operations improved to $145.4 million for the first three months of 2024 from $103.2 million for the first three months of 2023, primarily driven by positive changes in working capital, partially offset by lower net income.

Net cash used in investing activities for the first three months of 2024 increased $1.4 million compared to the first three months of 2023, primarily due to a $1.5 million increase in net capital expenditures.

Net cash used in financing activities was $124.2 million for the first three months of 2024 compared to $105.5 million for the first three months of 2023, primarily reflecting a $53.1 million increase in net debt payments in the first three months of 2024 compared to the first three months of 2023, partially offset by a $34.2 million decrease in share repurchases between periods.

Six Months Ended

Provided by operating activities $ 172,102 $ 376,777

Used in investing activities (38,345) (41,860)

Used in financing activities (100,034) (328,542)

Net cash provided by operations decreased to $172.1 million for the first six months of 2024 from $376.8 million for the first six months of 2023, primarily driven by decreases in working capital as we have utilized more cash for vendor early buy payments in 2024 versus 2023 and lower net income.

Net cash used in investing activities for the first six months of 2024 decreased $3.5 million compared to the first six months of 2023, primarily due to a decrease of $7.1 million in cash used for acquisitions, partially offset by a $4.7 million increase in net capital expenditures.

Net cash used in financing activities was $100.0 million for the first six months of 2024 compared to $328.5 million for the first six months of 2023, primarily reflecting $62.9 million of net debt proceeds in the first six months of 2024 versus $202.5 million of net debt payments in the first six months of 2023, partially offset by a $33.8 million increase in share repurchases and a $6.3 million increase in dividends paid in the first six months of 2024 compared to the same period in 2023.

Future Sources and Uses of Cash

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

At March 31, 2024, there was $115.4 million of revolving borrowings outstanding, a $481.3 million term loan, a $16.0 million standby letter of credit outstanding and $618.6 million available for borrowing under the Credit Facility.

The weighted average effective interest rate for the Credit Facility as of March 31, 2024, was approximately 4.3%, excluding commitment fees and including the impact of our interest rates swaps.

At June 30, 2024, there was $178.4 million of revolving borrowings outstanding, a $475.0 million term loan, a $16.0 million standby letter of credit outstanding and $561.9 million available for borrowing under the Credit Facility.

The weighted average effective interest rate for the Credit Facility as of June 30, 2024, was approximately 4.5%, excluding commitment fees and including the impact of our interest rates swaps.

Term Facility

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

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

At March 31, 2024, there was $109.9 million outstanding under the Term Facility with a weighted average effective interest rate of 6.6%.

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

At June 30, 2024, there was $109.9 million outstanding under the Term Facility with a weighted average effective interest rate of 6.6%.

Receivables Securitization Facility

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Upon payment of the receivables by customers, rather than remitting to the financial institutions the amounts collected, we retain such collections as proceeds for the sale of new receivables until payments become due.

At March 31, 2024, there was $262.3 million outstanding under the Receivables Facility at a weighted average effective interest rate of 6.2%, excluding commitment fees.

At June 30, 2024, there was $334.7 million outstanding under the Receivables Facility at a weighted average effective interest rate of 6.2%, excluding commitment fees.

Financial Covenants

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

As of March 31, 2024, the calculations of these two covenants are detailed below:

As of June 30, 2024, the calculations of these two covenants are detailed below:

• Maximum Average Total Leverage Ratio .

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

As of March 31, 2024, our average total leverage ratio equaled 1.36 (compared to 1.39 as of December 31, 2023) and the TTM average total indebtedness amount used in this calculation was $1.0 billion.

As of June 30, 2024, our average total leverage ratio equaled 1.42 (compared to 1.36 as of March 31, 2024) and the TTM average total indebtedness amount used in this calculation was $1.0 billion.

• Minimum Fixed Charge Coverage Ratio .

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Fixed Charge Ratio is the ratio of the TTM EBITDAR divided by TTM Interest Expense paid or payable in cash plus TTM Rental Expense (as those terms are defined in the Credit Facility).

As of March 31, 2024, our fixed charge ratio equaled 5.71 (compared to 5.94 as of December 31, 2023) and TTM Rental Expense was $95.0 million.

As of June 30, 2024, our fixed charge ratio equaled 5.37 (compared to 5.71 as of March 31, 2024) and TTM Rental Expense was $97.8 million.

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.

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

As of March 31, 2024, we had two interest rate swap contracts in place and one forward-starting interest rate swap contract, each of which has the effect of converting our exposure to variable interest rates on a portion of our variable rate borrowings to fixed interest rates.

As of June 30, 2024, we had two interest rate swap contracts in place and one forward-starting interest rate swap contract, each

of which has the effect of converting our exposure to variable interest rates on a portion of our variable rate borrowings to fixed interest rates.

For more information, see Note 4 of “Notes to Consolidated Financial Statements” included in Part I, Item 1 of this Form 10-Q.

Compliance and Future Availability

As of March 31, 2024, we were in compliance with all material covenants and financial ratio requirements under our Credit Facility, our Term Facility and our Receivables Facility.

As of June 30, 2024, we were in compliance with all material covenants and financial ratio requirements under our Credit Facility, our Term Facility and our Receivables Facility.

We believe we will remain in compliance with all material covenants and financial ratio requirements throughout the next twelve months.

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If suitable acquisition opportunities arise that would require financing, we believe that we would have the ability to finance any such transactions.

As of April 24, 2024, $283.8 million remained available to purchase shares of our common stock under our current Board-approved share repurchase program.

As of July 25, 2024, $572.1 million remained available to purchase shares of our common stock under our current Board-approved share repurchase program.

We expect to repurchase shares on the open market from time to time subject to market conditions.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis