What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-27 compared with 2024-02-27 · 153 added, 165 removed, 366 unchanged (46% of the section changed)

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Financial Results

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

Base business results approximated consolidated results for 2023.

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

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

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

Net sales decreased 4% to $5.3 billion in 2024 compared to $5.5 billion in 2023.

Base business results approximated consolidated results for the year.

Maintenance activities remained stable throughout 2024, reflecting steady demand for non-discretionary products, while sales of discretionary products for new pool construction and remodeling were softer, impacted by macroeconomic conditions.

Inflationary product cost increases moderated, benefiting net sales approximately 1% to 2% in 2024, compared to 3% to 4% in 2023.

Gross profit was $1.6 billion in 2024, a 5% decrease from gross profit of $1.7 billion in 2023.

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

Gross margin declined 30 basis points to 29.7% in 2024 compared to 30.0% in 2023.

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

Pricing optimization efforts, the reversal of previously recorded estimated import taxes in the first quarter of 2024 and higher volume-related purchase incentives compared to last year benefited our current year gross margin.

These impacts were offset by a less favorable product and customer mix.

Selling and administrative expenses (operating expenses) increased 5%, or $44.7 million, to $958.1 million in 2024.

As a percentage of net sales, operating expenses increased 150 basis points to 18.0% in 2024 compared to 16.5% in 2023.

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

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

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

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

These increases were partially mitigated by close management of variable costs.

Operating income for the year decreased 17% to $617.2 million, down from $746.6 million in 2023.

Operating margin decreased 190 basis points to 11.6% in 2024 compared to 13.5% in 2023.

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

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

Interest and other non-operating expenses, net for the year was reduced by $8.2 million compared to 2023, primarily due to lower average debt between periods.

We recorded an $8.8 million, or $0.23 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, for the year ended December 31, 2024 compared to a tax benefit of $6.7 million, or $0.17 per diluted share, realized in 2023.

Net income declined 17% to $434.3 million in 2024 compared to $523.2 million in 2023.

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

Earnings per share decreased 15% to $11.30 per diluted share compared to $13.35 per diluted share in 2023.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share decreased 16% to $11.07 per diluted share compared to $13.18 per diluted share in 2023.

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

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

Financial Position and Liquidity

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

• a $333.5 million debt reduction

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

Net cash provided by operations was $659.2 million in 2024.

Our cash flows were impacted by our inventory reduction efforts in 2023 and lower net income in 2024.

These impacts were partially offset by a benefit of $68.5 million from the deferral of our third and fourth quarter estimated tax payments, subsequently paid in February 2025, as allowed for companies impacted by Hurricane Francine.

Our 2024 operating cash flows helped to fund the following initiatives:

• share repurchases including related excise tax payments, totaling $306.3 million for the year;

• quarterly cash dividend payments to shareholders, totaling $179.6 million for the year;

• a $103.0 million debt reduction;

• net capital expenditures and acquisitions of $64.2 million.

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Our days sales outstanding ratio, as calculated on a trailing four quarters basis, was 26.3 days at December 31, 2024 and 26.8 days at December 31, 2023.

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

Our inventory management efforts reduced our inventory levels by 6% to $1.3 billion, compared to $1.4 billion at December 31, 2023, outpacing the 4% decline in net sales.

Our reserve for inventory obsolescence was $26.7 million at December 31, 2024 compared to $23.5 million at December 31, 2023.

Our inventory turns, as calculated on a trailing four quarters basis, were 2.8 times at December 31, 2024 and 2.7 times at December 31, 2023.

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

Total debt outstanding of $950.4 million at December 31, 2024 decreased $103.0 million compared to December 31, 2023 as we have used operating cash flows to reduce our debt.

Current Trends and Outlook

Over the past decade, consumers’ investments in their homes, including backyard renovations, have flourished.

In recent years, steady increases in home values, lack of affordable new homes and increased mortgage rates have prompted homeowners to stay in their homes longer and upgrade their home environments, including their backyards.

Many families have spent more time at home and sought opportunities to create or expand home-based outdoor living and entertainment spaces.

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

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

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

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

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

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

Consumers’ investments in their homes, including backyard renovations, continue to be favorable.

In recent years, steady increases in home values, lack of affordable new homes and increased mortgage rates have positioned homeowners to stay in their homes longer and upgrade their home environments, including their backyards.

During the COVID-19 pandemic (generally 2020 through 2022), we experienced unprecedented demand as families spent more time at home and sought opportunities to create or expand home-based outdoor living and entertainment spaces.

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

Beginning in the latter half of 2022 through 2024, these trends moderated resulting in lagging new pool construction and remodeling activities.

As a result, in 2024, we estimate that new in-ground pool construction units decreased 15% from 72,000 units in 2023 to 61,000 units, impacted by lower discretionary activities and further pressured by the macroeconomic environment.

Market conditions in 2024 were challenged by generally higher than normal interest rates and product cost and labor inflation, which led to consumer hesitancy on discretionary spending and some cyclical suppression of demand.

While these market conditions impacted new pool construction and remodeling projects, our non-discretionary maintenance product sales in 2024 were not significantly impacted.

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

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

As lower housing turnover encourages consumers to renovate their existing homes, we expect that consumers will continue to invest in outdoor living spaces as they consider backyards an extension of their home space.

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

In view of current trends, we established our outlook for 2025 based on reasonable expectations for industry demand, pricing and inflationary conditions, continued capacity creation to have a positive impact on variable expenses, continued investment in our digital transformation initiatives and ongoing leverage of existing investments in our business and continuous process improvements.

We also plan to broaden our geographic presence by opening 8 to 10 new sales centers in 2025 and by making selective acquisitions when appropriate opportunities arise.

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

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◦ 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%;

◦ similar volumes of discretionary products used for pool construction and remodeling, renovation and upgrading of pools as 2024;

◦ inflationary product cost increases, which generally pass through to customers of approximately 1% to 2%;

◦ a 1% benefit from expansion of the installed base of in-ground swimming pools.

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

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

• We expect to leverage our existing infrastructure and manage discretionary spending to maintain expenses in line with sales expectations to achieve operating margin of approximately 13.0%.

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

◦ one less selling day in the first quarter and for the full year of 2025 compared to 2024.

• We project gross margin for the full year of 2025 to be in the range of our 2024 gross margin at 29.7% and our long-term target of 30.0%, with our highest margin in the second quarter of the year.

We expect that our long-term gross margin target will be more achievable as construction trends improve.

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

• We expect to leverage our existing infrastructure and strategically manage discretionary spending.

We project that our operating expenses in 2025 will be impacted by the following factors:

◦ an increase of approximately $15.0 million in performance-based compensation to incentivize and reward our employees;

◦ $10.0 million of spend for new sales centers as we further expand our sales center network;

◦ continued investment in technological solutions to enhance our customer service;

◦ inflationary increases in areas such as labor and occupancy costs with some offsets from our efficiency initiatives.

In 2025, we expect our effective tax rate will be around 25% without the impact of ASU 2016-09.

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

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The estimated impact related to ASU 2016-09 is subject to several assumptions which can vary significantly, including our estimated share price and the period that our employees will exercise vested stock options.

We recorded a $6.7 million benefit in our provision for income taxes for the year ended December 31, 2023 related to ASU 2016-09.

We recorded an $8.8 million benefit in our provision for income taxes for the year ended December 31, 2024 related to ASU 2016-09.

We project that 2025 earnings will be in the range of $11.08 to $11.58 per diluted share, including an estimated $0.08 benefit from ASU 2016-09 during the first quarter of 2025.

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

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

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

our ability to maintain favorable relationships with suppliers and manufacturers;

the extent to which home-centric trends experienced during the height of the pandemic will moderate or reverse;

the extent to which favorable consumer spending trends over the past several years will continue;

competition from other leisure product alternatives or mass merchants;

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Also see “Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995” prior to the heading “Risk Factors” in Item 1A.

COVID-19 Pandemic and Other Economic Trends

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

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

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

We expect these trends to continue in 2024.

Our industry also experienced substantial supply chain constraints beginning in 2021.

In response, we proactively made significant investments in inventory in the last half of 2021 and early 2022 that enabled us to continue to meet strong customer demand and position ourselves to provide exceptional customer service.

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

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

CRITICAL ACCOUNTING ESTIMATES

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At the same time, we continuously strive to better manage our slower moving classes of inventory, which are not as critical to our customers and thus, inherently turn at slower rates.

We classify products at the sales center level based on sales at each location over the expected sellable period, which is the previous 12 months for most products, except for special order non-stock items that lack a SKU in our system and products with less than 12 months of usage.

Below is a description of these inventory classifications:

• new products with less than 12 months usage;

• highest sales velocity items, which represent approximately 80% of net sales at the sales center;

• lower sales velocity items, which we keep in stock to provide a high level of customer service;

• products with no sales for the past 12 months at the local sales center level, excluding special order products not yet delivered to the customer;

• non-stock special order items.

There is little risk of obsolescence for our highest sales velocity items because these products generally turn quickly.

We establish our reserve for inventory obsolescence based on inventory with lower sales velocity and inventory with no sales for the past 12 months, which we believe represent some exposure to inventory obsolescence, with particular emphasis on SKUs with the least sales over the previous 12 months.

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

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

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

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

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

We record reserves as necessary based on our evaluations.

We have not changed our methodology from prior years.

In evaluating the adequacy of our reserve for inventory obsolescence, we consider a combination of factors, including:

• the level of inventory in relation to historical sales by product, including inventory usage by class based on product sales at both the sales center level and on a company-wide basis;

• the level of inventory in relation to historical sales by product, including inventory usage based on product sales at both the sales center level and on a company-wide basis;

• changes in customer preferences or regulatory requirements;

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

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

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

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Starting in June, and continuing each quarter through our fiscal year end, we adjust our estimated performance-based compensation accrual based on our detailed analysis of each bonus plan, the participants’ progress toward achievement of their specific objectives and management’s estimates related to the discretionary components of the bonus plans, if any.

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

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

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

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

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

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

The fair value estimates used in our impairment test is determined using discounted cash flow models, which require the use of significant unobservable inputs, representative of a Level 3 fair value measurement.

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

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

We have the option of first analyzing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

When a qualitative goodwill test is performed, we analyze factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test.

The evaluation of qualitative factors includes an assessment of relevant facts, events and circumstances including but not limited to:

macroeconomic conditions, industry and market conditions, and the current and forecasted financial performance of the reporting unit.

In combination with our qualitative test, we also estimate the fair value of our reporting units by projecting company-wide future cash flows using management’s assumptions for sales growth rates, operating margins and discount rates.

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

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

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

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

To the extent our qualitative test indicates it is more likely than not that the fair value of a reporting unit is less than the carrying amount or for any reporting unit where we only perform a quantitative test, we perform a discounted cash flow analysis at the reporting unit level to further evaluate our initial fair value estimate.

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

The fair value estimates used in our impairment test are determined using discounted cash flow models, which require the use of significant unobservable inputs, representative of a Level 3 fair value measurement.

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

To test the reasonableness of our fair value estimates, we compared our aggregate estimated fair values to our market capitalization as of the date of our annual impairment test.

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

To test the reasonableness of our fair value estimate, we compared our company-wide estimated fair value to our market capitalization as of the date of our annual impairment test.

In 2024, our company-wide estimated fair value was in line with our market capitalization.

To facilitate a sensitivity analysis, we reduced our consolidated fair value estimate to reflect more conservative discounted cash flow assumptions, the sensitivity of a 150 basis point increase in our estimated weighted average cost of capital or a 50 basis point decrease in the estimated perpetuity growth rate.

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

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

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

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

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

In October 2024, we performed our annual goodwill impairment test and did not record any goodwill impairment at the reporting unit level.

As of October 1, 2024, we had 251 reporting units with allocated goodwill balances.

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

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

Following this, in October 2023, we performed our annual goodwill impairment test and did not recognize any goodwill impairment at the reporting unit level.

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

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

Recent Accounting Pronouncements

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Base Business

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

When calculating our base business results, we exclude for a period of 15 months sales centers that are acquired, opened in new markets or closed.

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

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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-K as base business results approximated consolidated results, and acquisitions and sales centers excluded from base business contributed less than 1% to the change in net sales.

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

We have not provided separate base business income statements within this Form 10-K as base business results closely approximated consolidated results.

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 2024:

December 31, 2023 439

Acquired location 5

Acquired locations 2

New locations 10

Closed/consolidated locations (3)

December 31, 2024 448

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Net sales $ 5,311.0 $ 5,541.6 $ (230.6) (4)%

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

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

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

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

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

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

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

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

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

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

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

Net sales in 2024 declined 4% compared to 2023.

During 2024, maintenance activities were stable, reflecting steady demand for non-discretionary products, while sales volumes for discretionary products declined, impacted by unfavorable macroeconomic conditions.

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

• lower sales volumes due to a decline in discretionary products used in new pool construction and renovation projects (see discussion below);

• stability from maintenance-related revenues, evidenced by 2% sales growth in chemicals compared to 2023, which represented 15% of our net sales;

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

In 2024, sales of equipment, which is used across maintenance, renovation and new pool construction and includes swimming pool heaters, pumps, lights, filters and automation, were flat compared to 2023 and represented approximately 31% of net sales in 2024.

Sales of building materials fell 10% compared to 2023 and represented approximately 12% of net sales in 2024.

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In 2024, sales to retail customers decreased 4% compared to 2023 and represented approximately 14% of our consolidated net sales.

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

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

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

Sales to commercial customers increased 9% compared to 2023 and represented approximately 5% of our consolidated net sales in 2024.

2024 Quarterly Sales Performance Compared to 2023 Quarterly Sales Performance

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Net Sales Decline (7)% (5)% (3)% (2)%

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

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

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

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

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

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

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

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

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

• In the first quarter of 2024, net sales were affected by lower sales volumes due to reduced pool construction and discretionary activity.

Unfavorable weather conditions further reduced sales by approximately 2%.

Net sales benefited from a greater concentration of customer early buys and approximately 1% to 2% from inflationary product cost increases, net of price deflation, compared to an inflationary benefit of 4% to 5% in the first quarter of 2023.

• During the second quarter of 2024, maintenance-related revenues remained stable, with chemical sales growing 1% compared to the second quarter of 2023, representing 15% of net sales.

Net sales were negatively impacted by lower sales volumes due to reduced pool construction and discretionary activities.

Sales benefited approximately 1% from inflationary product cost increases, net of price deflation, which was lower than the 3% to 4% benefit observed in the second quarter of 2023.

• Net sales in the third quarter of 2024 were supported by steady demand for maintenance products while the discretionary portions of our business continued to see pressure resulting in lower sales volumes due to a decline in pool construction and discretionary spending.

The third quarter of 2024 benefited approximately 2% from an additional selling day compared to the same period in 2023.

• In the fourth quarter of 2024, lower sales during this seasonally slower period were impacted by weaker spending on discretionary products and solid performance in maintenance-related sales.

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

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Gross margin 29.7 % 30.0 %

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

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

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

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

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

Gross margin declined 30 basis points to 29.7% in 2024 compared to 30.0% in 2023, impacted by:

• higher inventory costs in 2024 as we were carrying a significant amount of lower cost strategically-purchased inventory in the beginning of 2023 that was successfully reduced to normalized levels by the end of 2023 and had an unfavorable impact on 2024;

• less favorable product and customer mix.

A $12.6 million reversal of previously recorded estimated import taxes in the first quarter of 2024 increased gross margin by 20 basis points.

Gross margin also benefited from our margin initiatives, such as increased sales of higher margin private-label chemicals, and 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.

Operating Expenses

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Operating expenses increased 5%, or $44.6 million, to $958.1 million in 2024, up from $913.5 million in 2023.

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

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

The primary drivers of expense growth were higher costs associated with the expansion of our network and our technology initiatives as well as inflationary rent, wage and insurance increases.

These increases were partially mitigated through close management of our variable costs and lower performance-based compensation.

Interest and Other Non-operating Expenses, net

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

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

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

Interest and other non-operating expenses, net decreased $8.2 million compared to 2023, primarily due to a decrease in average debt between periods.

Our weighted average effective interest rate was 5.2% in 2024 and 2023 on average outstanding debt of $956.3 million in 2024 versus $1.1 billion in 2023.

Our effective income tax rate was 23.4% at December 31, 2024 and 24.0% at December 31, 2023.

We recorded a $8.8 million, or $0.23 per diluted share, benefit from ASU 2016-09 for the year ended December 31, 2024 compared to a benefit of $6.7 million, or $0.17 per diluted share, realized in 2023.

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

Without the benefits from ASU 2016-09, our effective tax rate was 25.0% for both the years ended 2024 and 2023.

Net Income and Earnings Per Share

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Adjusted diluted EPS is a key measure used by management to demonstrate the impact of tax benefits from ASU 2016-09 on our diluted EPS and to provide investors and others with additional information about our potential future operating performance to supplement GAAP measures.

We believe this measure should be considered in addition to, not as a substitute for, diluted EPS presented in accordance with GAAP, and in the context of our other disclosures.

Other companies may calculate this non-GAAP financial measure differently than we do, which may limit their usefulness as a comparative measure.

We believe this measure should be considered in addition to, not as a substitute for, diluted EPS presented in accordance with GAAP, and in the context of our other disclosures in this Form 10-K.

Other companies may calculate this non-GAAP financial measure differently than we do, which may limit its usefulness as a comparative measure.

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

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For discussion regarding the effects seasonality and weather have on our business, see Item 1, “Business,” of this Form 10-K.

The following table presents certain unaudited quarterly data for 2023 and 2022.

We have included income statement and balance sheet data for the most recent eight quarters to allow for a meaningful comparison of the seasonal fluctuations in these amounts.

In our opinion, this information reflects all normal and recurring adjustments considered necessary for a fair presentation of this data.

Due to the seasonal nature of our industry, the results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing trends.

The following table presents certain unaudited quarterly included income statement and balance sheet data for the most recent eight quarters to allow for a meaningful comparison of the seasonal fluctuations in these amounts.

We believe this information reflects all normal and recurring adjustments considered necessary for a fair presentation of this data.

Due to the seasonal nature of our industry, the results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing trends, including the impact of new and acquired sales centers.

(Unaudited) QUARTER

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Weather Impacts on Fiscal Year 2024 to Fiscal Year 2023 Comparisons

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conversely, fourth quarter of 2022 had less favorable conditions.

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

The first quarter of 2024 was the tenth wettest first quarter on national 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 net 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.

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.

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 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.

Similarly, in the third quarter of 2023, hot temperatures across the southern United States were offset by rainy conditions in the Northeast, resulting in a fairly neutral impact on our business.

Repair and replacement activity following Hurricanes Helene and Milton provided some weather-related benefits to Florida’s fourth quarter results, contributing to an increase in consolidated sales of approximately 1%.

The fourth quarter of 2024 was warmer than average with low precipitation across the country.

October 2024 was one of the warmest and driest months on record while November provided some relief with above average precipitation levels in the Midwest.

December was consistent with observed trends with both above-average temperatures and below-average precipitation.

Excluding Florida, the fourth quarter of 2024 was comparable to the fourth quarter of 2023 which had overall warm weather conditions.

Weather Impacts on Fiscal Year 2023 to Fiscal Year 2022 Comparisons

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

We focus our capital expenditure plans based on the needs of our existing sales centers and the opening of new sales centers.

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

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

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

Historically, our capital expenditures have averaged roughly 1.0% of net sales.

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

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

Capital expenditures were 1.1% of net sales in 2024, 1.1% of net sales in 2023 and 0.7% in 2022.

In 2022, our capital expenditures as a percentage of net sales were lower than our historical average due to significant sales growth in that year.

Based on management’s current plans, we project capital expenditures for 2025 will average 1% to 1.5% of net sales.

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

As of February 20, 2024, $344.1 million of the current Board authorized amount under our authorized share repurchase plan remained available.

As of February 20, 2025, $336.8 million remained available to purchase shares of our common stock under our current Board-approved share repurchase plan program.

We expect to repurchase additional shares in the open market from time to time depending on market conditions.

We plan to fund these repurchases with cash provided by operations and borrowings under our credit and receivables facilities.

We plan to fund these repurchases with cash provided by operations and borrowings under our credit and receivables facilities described below.

Sources and Uses of Cash

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Financing activities (576,550) (798,132)

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

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

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

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

Cash provided by operations of $659.2 million for 2024 decreased $229.0 million compared to 2023.

This decline was primarily driven by our inventory reduction efforts in prior year and lower net income in 2024.

These impacts were partially offset by a benefit from the hurricane relief deferral of our third and fourth quarter estimated tax payments totaling $68.5 million.

Cash used in investing activities decreased $5.4 million to $66.2 million in 2024, primarily reflecting a decrease of $6.8 million in payments for acquisitions compared to 2023.

Cash used in financing activities decreased to $576.6 million in 2024 compared to $798.1 million in 2023.

The change in financing activities primarily reflects a $232.4 million decrease in net debt payments, partially offset by an increase in dividends paid of $12.2 million.

For a discussion of our sources and uses of cash in 2022, see the Liquidity and Capital Resources – Sources and Uses of Cash section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2023 Annual Report on Form 10-K.

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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 one-month Term SOFR, plus an applicable margin.

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

Our Credit Facility, as amended, provides for $1.3 billion in borrowing capacity consisting of a $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 secured overnight financing rate (SOFR), plus an applicable margin.

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

The revolving credit facility matures on September 30, 2029.

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

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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.

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.

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Receivables Securitization Facility

Our two-year accounts receivable securitization facility (the Receivables Facility) offers us a lower-cost form of financing.

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.

Our two-year accounts receivable securitization facility (the Receivables Facility) offers us a lower-cost form of financing and was recently amended on October 31, 2024.

As amended, under this facility, we can borrow up to $375.0 million between April through May and from $210.0 million to $350.0 million during the remaining months of the year.

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

The Receivables Facility matures on November 1, 2024.

The Receivables Facility matures on October 30, 2026.

The Receivables Facility provides for the sale of certain of our receivables to a wholly owned subsidiary (the Securitization Subsidiary).

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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 December 31, 2023, our average total leverage ratio equaled 1.39 (compared to 1.37 as of December 31, 2022) and the TTM average total indebtedness amount used in this calculation was $1.1 billion.

As of December 31, 2024, our average total leverage ratio equaled 1.42 (compared to 1.39 as of December 31, 2023) and the TTM average total indebtedness amount used in this calculation was $970.1 million.

• Minimum Fixed Charge Coverage Ratio .

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The following table summarizes our obligations as of December 31, 2024 that are expected to impact liquidity and cash flow in future periods.

We believe we will be able to fund these obligations through our existing cash, cash expected to be generated from operations and borrowings on our facilities.

We believe we will be able to fund these obligations through our existing cash, cash expected to be generated from operations, borrowings on our facilities and proceeds from any future refinancing transactions.

Payments Due by Period

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The significant assumptions used in our determination of amounts presented in the above table are as follows:

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

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

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

• Long-term debt amounts represent only the future principal payments on our debt as of December 31, 2024.

Estimates of interest payable on this debt is separately reflected in the table appearing below.

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis