What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-10-30 compared with 2024-07-30 · 144 added, 139 removed, 240 unchanged (54% of the section changed)

18 unchanged sentences

Financial Results

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.

Net sales decreased 3% in the third quarter of 2024 to $1.4 billion compared to $1.5 billion in the third quarter of 2023.

Base business results approximated consolidated results for the period.

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.

Following similar trends from the first half of the year, our third quarter results were anchored by strong sales of non-discretionary maintenance products, while sales of pool construction and discretionary products remained soft compared to the third quarter of 2023.

Net sales benefited approximately 2% from one more selling day in the third quarter of 2024 versus the same period in 2023.

Gross profit decreased 3% to $416.4 million in the third quarter of 2024 from $428.7 million in the same period of 2023.

Gross margin remained consistent at 29.1% for each of the third quarters of 2024 and 2023.

Increases in our selling and administrative expenses (operating expenses) moderated during the third quarter of 2024, growing 2% to $240.1 million compared to $234.3 million in the third quarter of 2023.

Expense increases in the quarter primarily related to inflationary impacts, the expansion of our network and our technology initiatives and were partially offset by lower variable costs and a timing shift of certain expenses from the third quarter of 2024 to the fourth quarter of 2024.

As a percentage of net sales, operating expenses increased to 16.8% in the third quarter of 2024 compared to 15.9% in the same period of 2023.

Operating income in the third quarter of 2024 decreased 9% to $176.4 million from $194.4 million in 2023.

Operating margin was 12.3% in the third quarter of 2024 compared to 13.2% in the third quarter of 2023.

Interest and other non-operating expenses, net for the third quarter of 2024 decreased $1.2 million compared to the third quarter of 2023, primarily due to a decrease in average debt between periods.

We recorded a $0.5 million tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting , in the quarter ended September 30, 2024, compared to a tax benefit of $0.4 million realized in the same period of 2023.

This resulted in a $0.01 per diluted share tax benefit in the third quarter of 2024 consistent with the $0.01 per diluted share tax benefit realized in the same period of 2023.

Net income decreased 9% to $125.7 million in the third quarter of 2024 compared to $137.8 million in the third quarter of 2023.

Earnings per diluted share decreased 7% to $3.27 in the third quarter of 2024 compared to $3.51 in the same period of 2023.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share decreased 7% to $3.26 compared to $3.50 in the third 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.

4 unchanged sentences

Financial Position and Liquidity

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.

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

Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 26.7 days at September 30, 2024 and 26.3 days at September 30, 2023.

Our allowance for doubtful accounts balance was $10.0 million at September 30, 2024 and $10.6 million at September 30, 2023.

Our inventory management efforts reduced our inventory levels compared to September 30, 2023 by $78.8 million, or 6%, to $1.2 billion.

Our inventory reserve was $28.6 million at September 30, 2024 and $25.9 million at September 30, 2023.

Our inventory turns, as calculated on a trailing four quarters basis, were 2.8 times at September 30, 2024 and 2.6 times at September 30, 2023.

As allowed for companies impacted by Hurricane Francine, we deferred our 2024 third quarter estimated federal tax payment of $42.0 million, which will be paid in February 2025.

Total debt outstanding was $923.8 million at September 30, 2024, down $110.1 million from September 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.

1 unchanged sentence

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 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;

• 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%.

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

We expect sales for the full year of 2024 to decline by approximately 5% from 2023 based on the following factors and assumptions:

• a 15-20% decline in volumes of discretionary products used for swimming pool construction;

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

• sustained demand for pool maintenance products, although less prominent to our fourth quarter sales mix;

• inflationary product cost increases of approximately 1%.

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

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

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 project that our annual effective tax rate (without the benefit from ASU 2016-09) for 2024 will be aroun d 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 recorded an $8.3 million, or $0.21 per diluted share, tax benefit from ASU 2016-09 for the nine months ended September 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 September 30, 2024.

We expect 2024 diluted EPS in the range of $11.06 to $11.46, including the impact of year-to-date tax benefits of $0.21.

We expect to continue to use cash for the payment of cash dividends as and when declared by our Board of Directors (Board) and to fund opportunistic share repurchases under our Board-authorized share repurchase program.

expect to continue to use cash for the payment of cash dividends as and when declared by our Board of Directors (Board) and to fund opportunistic share repurchases under our Board-authorized share repurchase program.

The forward-looking statements in the foregoing section and elsewhere in this report are based on current market conditions, speak only as of the filing date of this report, are based on several assumptions and are subject to significant risks and uncertainties.

1 unchanged sentence

RESULTS OF OPERATIONS

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.

As of September 30, 2024, we conducted operations through 447 sales centers in North America, Europe and Australia.

For the nine months ended September 30, 2024, approximately 96% 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 Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2024 2023 2024 2023

8 unchanged sentences

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

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

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

Base Business

3 unchanged sentences

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 three and six months ended June 30, 2024 closely approximated consolidated results for the same period.

We have not provided separate base business income statements within this Form 10-Q as our base business results for the three and nine months ending September 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:

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

December 31, 2023 439

1 unchanged sentence

New locations 9

Consolidated locations (2)

June 30, 2024 445

Consolidated/closed locations (3)

September 30, 2024 447

Three Months Ended

September 30,

(in millions) 2024 2023 Change

Net sales $ 1,432.9 $ 1,474.4 $ (41.5) (3)%

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.

Net sales of $1.4 billion in the third quarter of 2024 decreased 3% compared to $1.5 billion in the third quarter of 2023.

In the third quarter, recurring maintenance product sales remained strong, while spending on larger semi-discretionary items, as well as new pool construction and renovation projects, showed a more measured pace.

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

• 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 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.

• approximately 2% benefit from one more selling day in the third quarter of 2024 compared to the same quarter in 2023;

• stability from maintenance-related activities evidenced by volume growth in chemicals;

sales of chemicals increased 2% compared to the third quarter of 2023 and represented 17% of our net sales;

• approximately net 1% benefit from price comprised of a 2% benefit from inflation-driven price increases on equipment, offset by moderate declines in areas like chemical sanitizers and commodities;

• lower sales volumes due to a decline in pool construction and discretionary spending (see discussion below).

In the third quarter of 2024, sales of equipment, which is used across maintenance, renovation and new construction and includes swimming pool heaters, pumps, lights, filters and automation, grew 1% versus the same period 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 9% compared to the third quarter of 2023 and represented approximately 11% of net sales in the third quarter of 2024.

Sales to our retail customers declined by 2% in the third quarter of 2024, as steady maintenance sales during a key seasonal period partially offset ongoing weakness in discretionary demand, compared to the third quarter of 2023.

Retail sales represented approximately 14% of our total net sales in the third quarter of 2024.

Sales to commercial swimming pool customers remained strong with an increase of 7% in the third quarter of 2024 compared to the third quarter of 2023 and represented approximately 5% of our net sales for the third quarter of 2024.

Three Months Ended

September 30,

(in millions) 2024 2023 Change

1 unchanged sentence

Gross margin 29.1 % 29.1 %

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.

Gross margin remained consistent at 29.1% in both the third quarters of 2024 and 2023.

While being affected by unfavorable product and customer mix in the current environment, strategic gross margin-related initiatives and progress on our pricing optimization efforts sustained our gross margin.

Operating Expenses

Three Months Ended

September 30,

(in millions) 2024 2023 Change

1 unchanged sentence

Operating expenses as a % of net sales 16.8 % 15.9 %

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.

Operating expenses increased 2% in the third quarter of 2024 compared to the third quarter of 2023.

Expense growth drivers included inflationary increases, costs associated with opening new locations and investments in our technology initiatives.

These increases were partially offset by lower variable costs and a shift of certain expenses from the third quarter of 2024 to the fourth quarter of 2024.

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.

Interest and other non-operating expenses, net for the third quarter of 2024 decreased $1.2 million compared to the third quarter of 2023, primarily due to a decrease in average debt between periods.

Our weighted average effective interest rate remained unchanged at 5.2% in the third quarter of 2024 compared to the third quarter of 2023 on average outstanding debt of $946.1 million and $1.0 billion for the respective periods.

Our effective income tax rate was 23.4% for the three months ended September 30, 2024, compared to 23.8% for the three months ended September 30, 2023.

We recorded a $ 0.5 million tax benefit from ASU 2016-09 in the quarter ended September 30, 2024, compared to a tax benefit of $ 0.4 million realized in the same period last year.

Without the benefit from ASU 2016-09 in both periods, our effective tax rate was 23.7% for the third quarter of 2024 and 24.1% for the third quarter of 2023.

Our third quarter effective income tax rate is typically lower compared to other quarters due to the annual expiration of statutes of limitations in the various jurisdictions where we have recorded uncertain tax positions.

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.

Net income decreased 9% to $125.7 million in the third quarter of 2024 compared to $137.8 million in the third quarter of 2023.

Earnings per diluted share decreased 7% to $3.27 in the third quarter of 2024 compared to $3.51 in the same period of 2023.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share decreased 7% to $3.26 in the third quarter of 2024 compared to $3.50 in the third 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

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

Nine Months Ended

September 30,

(in millions) 2024 2023 Change

Net sales $ 4,323.5 $ 4,538.5 $ (215.0) (5)%

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.

Net sales for the first nine months of 2024 decreased 5% compared to the same period last year.

In the first nine months of 2024, maintenance activities were stable, reflecting steady demand for non-discretionary products, while pool construction and discretionary spending were softer, impacted by current macroeconomic conditions.

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.

• stability from maintenance-related activities evidenced by volume growth in chemicals;

sales of chemicals increased 1% compared to the first nine months of 2023 and represented 15% of our net sales;

• approximately 1% benefit from inflationary product cost increases;

• negative volume impacts from reduced pool construction and discretionary activities (see discussion below).

In the first nine months of 2024, sales of equipment, which is used across maintenance, renovation and new construction and includes swimming pool heaters, pumps, lights, filters and automation, decreased approximately 1% compared to the same period last year and collectively represented 30% of net sales in the first nine months of 2024.

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

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

Sales to commercial customers increased 8% in the first nine months of 2024 compared to the first nine months of 2023 and represented approximately 5% of our consolidated net sales in the first nine months of 2024.

Nine Months Ended

September 30,

(in millions) 2024 2023 Change

1 unchanged sentence

Gross margin 29.7 % 30.1 %

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.

Gross margin declined 40 basis points to 29.7% in the nine months ended September 30, 2024, compared to 30.1% in the first nine months of 2023.

In the first nine months of 2024, our gross margin was impacted by:

• carrying a large amount of lower cost strategically-purchased inventory in the beginning of 2023 that was successfully reduced to normalized levels by the end of 2023;

• less favorable product and customer mix;

• higher levels of vendor incentives earned versus 2023 due to increased purchasing as compared to the prior year when we were actively reducing inventory levels;

• a benefit of $12.6 million, or 30 basis points, related to a reduction of estimated import taxes previously recorded in the fourth quarter of 2022.

Operating Expenses

Six Months Ended

Nine Months Ended

September 30,

(in millions) 2024 2023 Change

1 unchanged sentence

Operating expenses as a % of net sales 16.9 % 15.4 %

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.

Operating expenses for the nine months ended September 30, 2024 were up 4% compared to the prior year period.

Expense growth drivers included inflationary wage, rent and insurance increases, higher costs associated with the expansion of our network and additions related to our technology initiatives.

We partially mitigated these increases with close management of variable costs.

Interest and Other Non-Operating Expenses, Net

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.

Interest and other non-operating expenses, net for the first nine months of 2024 decreased $6.5 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 5.2% from 5.1% for the respective periods on average outstanding debt of $1.0 billion for the first nine months of 2024 versus $1.2 billion for the same period of 2023.

Our effective income tax rate was 23.2% for the nine months ended September 30, 2024, compared to 24.1% for the nine months ended September 30, 2023.

We recorded an $8.3 million, or $0.21 per diluted share, tax benefit from ASU 2016-09 in the nine months ended September 30, 2024, compared to a $5.9 million, or $0.15 per diluted share, tax benefit in the same period of 2023.

Without the benefits from ASU 2016-09, our effective tax rate was 24.8% for the nine months ended September 30, 2024, and 25.0% for the nine months ended September 30, 2023.

Net Income and Earnings Per Share

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.

Net income decreased 16% to $397.0 million for the nine months ended September 30, 2024, compared to $471.8 million for the nine months ended September 30, 2023.

Earnings per diluted share decreased 14% to $10.30 for the nine months ended September 30, 2024, versus $12.00 per diluted share for the nine months ended September 30, 2023.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share decreased 15% to $10.09 for the nine months ended September 30, 2024, compared to $11.85 for the nine months ended September 30, 2023.

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

7 unchanged sentences

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

(Unaudited) Three Months Ended Six Months Ended

June 30, June 30,

(Unaudited) Three Months Ended Nine Months Ended

September 30, September 30,

2024 2023 2024 2023

14 unchanged sentences

(in thousands) 2024 2023 2022

Second First Fourth Third Second First Fourth Third

Third Second First Fourth Third Second First Fourth

Statement of Income Data

29 unchanged sentences

Weather Impacts on 2024 and 2023 Results

The third quarter of 2024 saw a mix of weather conditions across the continental U.S.

Several regions faced notable weather events during the quarter.

Tropical weather brought localized flooding and heavy rainfall particularly to the coastal areas of Florida, Louisiana and the Carolinas.

Wetter conditions and cooler temperatures in July of 2024, compared to July of 2023, impacted maintenance activities in Texas, a key market, during a prominent selling month.

The Northeast and Midwest regions experienced generally warm and dry conditions throughout the quarter, which was favorable for pool-related activities.

The West, particularly in California, continued its trend of above-average temperatures and dry conditions, which supported outdoor and construction activities.

Collectively, weather conditions in the third quarter of 2024 had a relatively neutral impact on the overall business.

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

4 unchanged sentences

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.

The first quarter of 2024 was the tenth wettest first 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.

48 unchanged sentences

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

Six Months Ended

Nine Months Ended

September 30,

Provided by operating activities $ 488,619 $ 750,018

1 unchanged sentence

Used in financing activities (411,785) (656,835)

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.

Net cash provided by operations decreased to $488.6 million for the first nine months of 2024 from $750.0 million for the first nine months of 2023, impacted by our prior year inventory reduction efforts of $330.9 million during the first nine months of 2023 and lower net income in 2024.

Net cash used in investing activities for the first nine months of 2024 decreased $5.1 million compared to the first nine months of 2023, primarily due to a decrease of $7.1 million in cash used for acquisitions, partially offset by a $3.0 million increase in net capital expenditures.

Net cash used in financing activities was $411.8 million for the first nine months of 2024 compared to $656.8 million for the first nine months of 2023, primarily reflecting $128.4 million of net debt payments in the first nine months of 2024 versus $353.4 million of net debt payments in the first nine months of 2023, partially offset by a $27.7 million decrease in share repurchases and a $9.2 million increase in dividends paid in the first nine months of 2024 compared to the same period in 2023.

Future Sources and Uses of Cash

To supplement cash from operations as our primary source of working capital, we plan to continue to utilize our three major credit facilities, which are the Amended and Restated Revolving Credit Facility (the Credit Facility), the Term Facility (the Term Facility) and the Receivables Securitization Facility (the Receivables Facility).

To supplement cash from operations as our primary source of working capital, we plan to continue to utilize our three major credit facilities, which are the Third Amended and Restated Revolving Credit Facility (the Credit Facility), the Term Facility (the Term Facility) and the Receivables Securitization Facility (the Receivables Facility).

For additional details regarding these facilities, see the summary descriptions below and more complete descriptions in Note 5 of our “Notes to Consolidated Financial Statements,” included in Part II, Item 8 in our 2023 Annual Report on Form 10-K and Note 5 of “Notes to Consolidated Financial Statements” included in Part I, Item 1 of this Form 10-Q.

Credit Facility

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

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

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

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

Our Credit Facility, as recently amended, provides for $1.3 billion in borrowing capacity consisting of an $800.0 million unsecured revolving credit facility and a $500.0 million term loan facility.

The Credit Facility also includes an accordion feature permitting us to request one or more incremental term loans or revolving credit family commitment increases up to $250.0 million and sublimits for the issuance of swingline loans and standby letters of credit.

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

The term loan requires quarterly amortization payments with all remaining principal due on September 25, 2026.

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

At 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.

Under our Credit Facility, at September 30, 2024, there was $125.0 million of revolving borrowings outstanding, a $468.8 million term loan, $15.1 million of standby letters of credit outstanding and $659.9 million available for borrowing.

The weighted average effective interest rate for the Credit Facility as of September 30, 2024, was approximately 4.1%, excluding commitment fees and including the impact of our interest rates swaps.

Term Facility

2 unchanged sentences

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

The Term Facility is repaid in quarterly installments of 1.250% of the Term Facility on the last business day of each quarter beginning in the first quarter of 2020 with the final principal repayment due on the maturity date.

The Term Facility is repaid in quarterly

installments of 1.250% of the Term Facility on the last business day of each quarter beginning in the first quarter of 2020 with the final principal repayment due on the maturity date.

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

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

At June 30, 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 maturity.

At September 30, 2024, there was $109.9 million outstanding under the Term Facility with a weighted average effective interest rate of 6.1%.

Receivables Securitization Facility

1 unchanged sentence

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

The Receivables Facility matures on November 1, 2024.

The Receivables Facility matures on November 1, 2024 and it is our intent to complete a renewal in advance of the current maturity date.

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

2 unchanged sentences

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 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.

At September 30, 2024, there was $209.3 million outstanding under the Receivables Facility at a weighted average effective interest rate of 5.7%, 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 June 30, 2024, the calculations of these two covenants are detailed below:

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

• Maximum Average Total Leverage Ratio .

1 unchanged sentence

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 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.

As of September 30, 2024, our average total leverage ratio equaled 1.41 (compared to 1.42 as of June 30, 2024) and the TTM average total indebtedness amount used in this calculation was $989.5 million.

• Minimum Fixed Charge Coverage Ratio .

1 unchanged sentence

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 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.

As of September 30, 2024, our fixed charge ratio equaled 5.22 (compared to 5.37 as of June 30, 2024) and TTM Rental Expense was $100.3 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.

6 unchanged sentences

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 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.

As of September 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 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.

As of September 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.

3 unchanged sentences

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

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.

As of October 24, 2024, $497.0 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.

1 unchanged sentence

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