POOL CORP (POOL) FY 2024 MD&A

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

For a discussion of our base business calculations, see the RESULTS OF OPERATIONS section below.

2024 FINANCIAL OVERVIEW

Financial Results

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

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; and

•net capital expenditures and acquisitions of $64.2 million.

Total net receivables, including pledged receivables, decreased 8% compared to December 31, 2023, primarily due to lower sales in 2024. Our allowance for doubtful accounts was $8.6 million at December 31, 2024 and $11.7 million at December 31, 2023. 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.

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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 $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

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. 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.  Favorable weather positively impacts industry activity by accelerating growth in any given year, expanding the number of available construction days, extending the pool season and pool usage and positively impacting demand for discretionary products. Conversely, unfavorable weather typically impedes growth.

The following summarizes our outlook for 2025:

•We expect sales to be flat to a low single digit increase compared to 2024, impacted by the following factors and assumptions:

◦normal weather patterns for 2025;

◦sustained demand for pool maintenance products;

◦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%; and

◦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.

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•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; and

◦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. Due to ASU 2016-09 requirements, we expect our effective tax rate will fluctuate from quarter to quarter, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse. We estimate that we have approximately $3.2 million in unrealized excess tax benefits related to stock options that expire and restricted awards that vest in the first quarter of 2025. We may recognize additional tax benefits related to stock option exercises in 2025 from grants that expire in years after 2025, for which we have not included any expected benefits in our guidance. 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 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. We expect to continue to use cash for the payment of cash dividends as and when declared by our Board and to fund opportunistic share repurchases over the next year.

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, inflation, or interest rates; our ability to maintain favorable relationships with suppliers and manufacturers; the extent to which favorable consumer spending trends over the past several years will continue; competition from other leisure product alternatives or mass merchants; our ability to continue to execute our growth strategies; changes in the regulatory environment; new or additional taxes, duties or tariffs; excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in Item 1A of this Form 10-K. 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.

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CRITICAL ACCOUNTING ESTIMATES

Critical accounting estimates are those estimates made in accordance with U.S. generally accepted accounting principles that involve a significant level of estimation uncertainty and have had, or are reasonably likely to have, a material impact on our financial condition or results of operations.

Management has discussed the development, selection and disclosure of our critical accounting estimates with the Audit Committee of our Board. Our critical accounting estimates are discussed below, including, to the extent material and reasonably available, the impact such estimates have had, or are reasonably likely to have, on our financial condition or results of operations.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts based on an estimate of the losses we will incur if our customers do not make required payments. We perform periodic credit evaluations of our customers and typically do not require collateral. Consistent with industry practices, we generally require payment from our North American customers within 30 days, except for sales under early buy programs for which we provide extended payment terms to qualified customers. The extended terms usually require payments in equal installments in April, May and June or May and June, depending on geographic location. Credit losses have generally been within or better than our expectations.

Similar to our business, our customers’ businesses are seasonal. Sales are lowest in the winter months and our past due accounts receivable balance as a percentage of total receivables generally increases during this time. We provide reserves for uncollectible accounts based on our accounts receivable aging. These reserves range from 0.05% for amounts currently due to up to 100% for specific accounts more than 60 days past due.

At the end of each quarter, we perform a reserve analysis of all accounts with balances greater than $20,000 and more than 60 days past due. Additionally, we perform a separate reserve analysis on the balance of our accounts receivables with emphasis on past due accounts. We estimate future losses based upon historical bad debts, customer receivable balances, age of customer receivable balances, customers’ financial conditions and current and forecasted economic trends, including certain trends in the housing market, the availability of consumer credit and general economic conditions (as commonly measured by Gross Domestic Product or GDP). We monitor housing market trends through review of the House Price Index as published by the Federal Housing Finance Agency, which measures the movement of single-family home prices.

During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. These write-offs are charged against our allowance for doubtful accounts. In the past five years, write-offs have averaged approximately 0.10% of net sales annually.  Write-offs as a percentage of net sales approximated 0.16% in 2024, 0.12% in 2023 and 0.08% in 2022. We expect that write-offs will range from 0.05% to 0.10% of net sales in 2025.

At the end of each fiscal year, we prepare a hindsight analysis by comparing the prior year-end allowance for doubtful accounts balance to (i) current year write-offs and (ii) any significantly aged outstanding receivable balances. Based on our most recent hindsight analysis, we concluded that the prior year allowance was within a range of acceptable estimates and that our estimation methodology is appropriate.

If the balance of the accounts receivable reserve increased or decreased by 20% at December 31, 2024, pretax income would change by approximately $1.7 million and earnings per share would change by approximately $0.03 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2024).

Inventory Obsolescence

Product inventories represent the largest asset on our balance sheet. Our goal is to manage our inventory such that we minimize stock-outs to provide the highest level of service to our customers. To do this, we maintain at each sales center an adequate inventory of stock keeping units (SKUs) with the highest sales volumes. 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.

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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. The reserve is intended to reflect the value of inventory at net realizable value. 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 based on product sales at both the sales center level and on a company-wide basis;

•changes in customer preferences or regulatory requirements;

•seasonal fluctuations in inventory levels;

•geographic location; and

•superseded products and new product offerings.

We periodically adjust our reserve for inventory obsolescence as changes occur in the above-identified factors. At the end of each fiscal year, we prepare a hindsight analysis by comparing the prior year-end obsolescence reserve balance to (i) current year inventory write-offs and (ii) the value of products with no sales for the past 12 months that remain in inventory. Based on our most recent hindsight analysis, we concluded that our prior year reserve was within a range of acceptable estimates and that our estimation methodology is appropriate.

If the balance of our inventory reserve increased or decreased by 20% at December 31, 2024, pretax income would change by approximately $5.3 million and earnings per share would change by approximately $0.10 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2024).

Vendor Programs

Many of our vendor arrangements provide for us to receive specified amounts of consideration when we achieve any of a number of measures.  These measures generally relate to the volume level of purchases from our vendors, or our net cost of products sold, and may include negotiated pricing arrangements.  We account for vendor programs as a reduction of the prices of the vendor’s products and therefore a reduction of inventory until we sell the product, at which time we recognize such consideration as a reduction of cost of sales in our income statement.

Throughout the year, we estimate the amount earned based on our expectation of total purchases for the fiscal year relative to the purchase levels that mark our progress toward the attainment of various levels within certain vendor programs. We accrue vendor program benefits on a monthly basis using these estimates provided that we determine they are probable and reasonably estimable. Our estimates for annual purchases, future inventory levels and sales of qualifying products are driven by our sales projections, which can be significantly impacted by a number of external factors including changes in economic conditions and weather.  Changes in our purchasing mix also impact our estimates, as certain program rates can vary depending on our volume of purchases from specific vendors.

We continually revise these estimates throughout the year to reflect actual purchase levels and identifiable trends. As a result, our estimated quarterly vendor program benefits accrual may include cumulative catch-up adjustments to reflect any changes in our estimates between reporting periods. These adjustments have a greater impact on gross margin in the fourth quarter since it is our seasonally slowest quarter and because the majority of our vendor arrangements are based on calendar year periods. We update our estimates for these arrangements at year end to reflect actual annual purchase or sales levels. In the first quarter of the subsequent year, we prepare a hindsight analysis by comparing actual vendor credits received to the prior year vendor receivable balances. Based on our most recent hindsight analysis, we concluded that our vendor program estimates were within a range of acceptable estimates and that our estimation methodology is appropriate.

If market conditions were to change, vendors may change the terms of some or all of these programs. Although such changes would not affect the amounts we have recorded related to products already purchased, they may lower or raise our cost for products purchased and sold in future periods.

Income Taxes

We record deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when we expect the differences to reverse.  Due to changing tax laws and state income tax rates, significant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future.

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We record Global Intangible Low Tax Income (GILTI) on foreign earnings as period costs if and when incurred, although we have not realized any impacts since the December 2017 enactment of U.S. tax reform.

As of December 31, 2024, U.S. income taxes were not provided on the earnings or cash balances of our foreign subsidiaries, outside of the provisions of the transition tax from U.S. tax reform. As we have historically invested or expect to invest the undistributed earnings indefinitely to fund current cash flow needs in the countries where held, additional income tax provisions may be required. Determining the amount of unrecognized deferred tax liability on these undistributed earnings and cash balances is not practicable due to the complexity of tax laws and regulations and the varying circumstances, tax treatments and timing of any future repatriation.

We operate in 41 states, 1 United States territory and 11 foreign countries. We are subject to regular audits by federal, state and foreign tax authorities, and the amount of income taxes we pay is subject to adjustment by the applicable tax authorities.  We recognize a benefit from an uncertain tax position only after determining it is more likely than not that the tax position will withstand examination by the applicable taxing authority. Our estimate for the potential outcome of any uncertain tax issue is highly judgmental. We regularly evaluate our tax positions and incorporate these expectations into our reserve estimates. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters.  However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, or when statutes of limitation on potential assessments expire.  These adjustments may include changes in valuation allowances that we have established.  As a result of these uncertainties, our total income tax provision may fluctuate on a quarterly basis.

Each year, we prepare a return to provision analysis upon filing our income tax returns. Based on our most recent hindsight analysis, we concluded that our prior year income tax provision was within a range of acceptable estimates and that our provision calculation methodology is appropriate. Differences between our effective income tax rate and federal and state statutory tax rates are primarily due to excess tax benefits associated with the exercise of deductible nonqualified stock options and the lapse of restrictions on deductible restricted stock awards.

Performance-Based Compensation Accrual

The Compensation Committee of our Board (Compensation Committee) and our management have designed compensation programs intended to create a performance culture. The primary objectives of our compensation programs are to attract, motivate, reward and retain our employees without leading to unnecessary risk taking. Our compensation packages include bonus plans that are specific to groups of eligible participants and their levels and areas of responsibility. The majority of our bonus plans consist of annual cash payments that are based primarily on objective performance criteria. We calculate bonuses based on the achievement of certain key measurable financial and operational results, including operating income.

We use an annual cash performance award (annual bonus) to focus corporate behavior on short-term goals for growth, financial performance and other specific financial and business improvement metrics. Management sets the company’s annual bonus objectives at the beginning of the bonus plan year using both historical information and forecasted results of operations for the current plan year. Management also establishes specific business improvement objectives for both our operating units and corporate employees. The Compensation Committee approves objectives for annual bonus plans involving executive management.

We have also utilized our medium-term (three-year) Strategic Plan Incentive Program (SPIP) to provide senior management with an additional cash-based, pay-for-performance award based on the achievement of specified earnings growth objectives. Payouts through the SPIP are based on three-year compound annual growth rates (CAGRs) of our diluted EPS. Beginning in 2023, our Compensation Committee did not grant any awards under the SPIP.

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. We estimate total expected operating income for the current plan year using management’s estimate of the total overall incentives earned per the stated bonus plan objectives. 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.

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.

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We generally make bonus payments at the end of February following the most recently completed fiscal year. Each year, we compare the actual bonus payouts to amounts accrued at the previous year’s end to determine the accuracy of our performance-based compensation estimates. Based on our most recent hindsight analysis, we concluded that our performance-based compensation accrual balances were within a reasonable range of acceptable estimates and that our estimation methodologies are appropriate.

Impairment of Goodwill and Other Indefinite-Lived Intangible Assets

Goodwill is our largest intangible asset. At December 31, 2024, our goodwill balance was $698.9 million, representing approximately 21% of total assets. Goodwill represents the excess of the amount we paid to acquire a company over the estimated fair value of tangible assets and identifiable intangible assets acquired less liabilities assumed.

We 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. 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.

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 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. Our sensitivity analysis resulted in a fair value modestly lower than our market capitalization and did not result in the identification of additional at-risk locations.

If our assumptions or estimates in our fair value calculations change or if operating results are less than forecasted, we could incur impairment charges in future periods.  Impairment charges would decrease operating income, negatively impact diluted EPS and result in lower asset values on our balance sheet.

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. Our most significant goodwill balance of $401.6 million was related to our Porpoise Pool & Patio reporting unit and the next largest goodwill balance for a reporting unit was $12.1 million. The average goodwill balance per reporting unit was $2.8 million.

In 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. 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.

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Recent Accounting Pronouncements

See Note 1 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K for details.

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RESULTS OF OPERATIONS

The table below summarizes information derived from our Consolidated Statements of Income expressed as a percentage of net sales for the past three fiscal years:

Note: Due to rounding, percentages may not add to operating income or income before income taxes and equity in earnings.

Our discussion of consolidated operating results includes the operating results from acquisitions in 2024, 2023 and 2022.  We have included the results of operations in our consolidated results since the respective acquisition dates.

Fiscal Year 2024 compared to Fiscal Year 2023

Base Business

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.

We generally allocate corporate overhead expenses to excluded sales centers on the basis of their net sales as a percentage of total net sales. 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 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:

For information about our recent acquisitions, see Note 2 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

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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; and

•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.

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 growth in these areas is reflected in the discussion above. In 2024, sales to retail customers decreased 4% compared to 2023 and represented approximately 14% of our consolidated net sales. 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

•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 Profit

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; and

•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

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

Income Taxes

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 both the years ended 2024 and 2023.

Net Income and Earnings Per Share

Net income decreased 17% to $434.3 million in 2024 compared to $523.2 million in 2023. Earnings per share decreased 15% to $11.30 per diluted share compared to $13.35 per diluted share in 2023.

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Reconciliation of Non-GAAP Financial Measures

The non-GAAP measures described below should be considered in the context of all of our other disclosures in this Form 10-K.

Adjusted Diluted EPS

We have included adjusted diluted EPS, a non-GAAP financial measure, as a supplemental disclosure, because we believe this measure is useful to management, investors and others in assessing our year-over-year operating performance.

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 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.

Fiscal Year 2023 compared to Fiscal Year 2022

For a detailed discussion of the Results of Operations in Fiscal Year 2023 compared to Fiscal Year 2022, see the Results of Operations 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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Seasonality and Quarterly Fluctuations

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 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.

Note: Due to rounding, the sum of quarterly percentage amounts may not equal 100%.

Weather Impacts on Fiscal Year 2024 to Fiscal Year 2023 Comparisons

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

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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

For a detailed discussion of Weather Impacts on Fiscal Year 2023 compared to Fiscal Year 2022, see the Seasonality and Quarterly Fluctuations section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2023 Annual Report on Form 10-K.

Geographic Areas

Since all of our sales centers have similar operations and share similar economic characteristics, we aggregate our sales centers into a single reportable segment. For additional details, see Note 1 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

For a breakdown of net sales and property, plant and equipment between our United States and international operations, see Item 1, “Business,” of this Form 10-K.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is defined as the ability to generate adequate amounts of cash to meet short-term and long-term cash needs. We assess our liquidity in terms of our ability to generate cash to fund our operating activities, taking into consideration the seasonal nature of our business. Significant factors which could affect our liquidity include the following:

•cash flows generated from operating activities;

•the adequacy of available bank lines of credit;

•the quality of our receivables;

•acquisitions;

•dividend payments;

•capital expenditures;

•changes in income tax laws and regulations;

•the timing and extent of share repurchases; and

•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, technology-related investments, 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. Our working capital obligations fluctuate during the year, driven primarily by seasonality and the timing of inventory purchases. Our primary sources of working capital are cash from operations supplemented by bank borrowings, which have historically been sufficient to support our growth and finance acquisitions. We have funded our capital expenditures and share repurchases in substantially the same manner.

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We prioritize our use of cash based on investing in our business, maintaining a prudent capital structure, including a modest amount of debt, and returning cash to our shareholders through dividends and share repurchases. Our specific priorities for the use of cash are as follows:

•capital expenditures primarily for maintenance and growth of our sales center network, technology-related investments and fleet vehicles;

•inventory and other operating expenses;

•strategic acquisitions executed opportunistically;

•payment of cash dividends as and when declared by our Board;

•repayment of debt to maintain an average total target leverage ratio (as defined below) between 1.5 and 2.0; and

•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. 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 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.

We believe we have adequate availability of capital to fund present operations and the current capacity to finance any working capital needs that may arise.  We continually evaluate potential acquisitions and hold discussions with acquisition candidates. 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, 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 described below.

Sources and Uses of Cash

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

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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Future Sources and Uses of Cash

To supplement cash from operations as our primary source of working capital, we will 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). 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 Item 8 of this Form 10-K.

Credit Facility

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.

At December 31, 2024, there was $657.1 million outstanding, including a $462.5 million term loan, with a $15.1 million standby letter of credit outstanding and $590.3 million available for borrowing under the Credit Facility. The weighted average effective interest rate for the Credit Facility as of December 31, 2024 was approximately 4.0%, excluding commitment fees and including the impact of our interest rate swaps.

Term Facility

Our Term Facility provides for $185.0 million in borrowing capacity and matures on December 30, 2026. Proceeds from the Term Facility were used to pay down the Credit Facility in December 2019, adding borrowing capacity for future share repurchases, acquisitions and growth-oriented working capital expansion. 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. We may prepay amounts outstanding under the Term Facility without penalty other than interest breakage costs. In June 2023, we made a prepayment on the Term Facility of $45.0 million with $32.4 million applied against the remaining quarterly installments and the remainder applied against the amount due at maturity.

At December 31, 2024, the Term Facility had an outstanding balance of $109.9 million at a weighted average effective interest rate of 5.6%.

Receivables Securitization Facility

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 October 30, 2026.

The Receivables Facility provides for the sale of certain of our receivables to a wholly owned subsidiary (the Securitization Subsidiary). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities. Upon payment of the receivables by customers, rather than remitting to the financial institutions the amounts collected, we retain such collections as proceeds for the sale of new receivables until payments become due.

At December 31, 2024, there was $174.1 million outstanding under the Receivables Facility at a weighted average effective interest rate of 5.3%, excluding commitment fees.

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

•Maximum Average Total Leverage Ratio. On the last day of each fiscal quarter, our average total leverage ratio must be less than 3.25 to 1.00.  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, 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. On the last day of each fiscal quarter, our fixed charge ratio must be greater than or equal to 2.25 to 1.00. 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 December 31, 2024, our fixed charge ratio equaled 5.07 (compared to 5.94 as of December 31, 2023) and TTM Rental Expense was $104.0 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. We may declare and pay quarterly dividends so long as (i) the amount per share of such dividends is not greater than the most recently publicly announced dividends per share and (ii) our Average Total Leverage Ratio is less than 3.25 to 1.00 both immediately before and after giving pro forma effect to such dividends. Under the Credit Facility and Term Facility, we may repurchase shares of our common stock provided no default or event of default has occurred and is continuing, or would result from the repurchase of shares, and our maximum average total leverage ratio (determined on a pro forma basis) is less than 3.25 to 1.00.

Other covenants include restrictions on our ability to grant liens, incur indebtedness, make investments, merge or consolidate, and sell or transfer assets. Failure to comply with any of our financial covenants or any other terms of the Credit Facility and the Term Facility could result in higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.

Interest Rate Swaps

We utilize interest rate swap contracts and forward-starting interest rate swap contracts to reduce our exposure to fluctuations in variable interest rates for future interest payments on our variable rate borrowings. Interest expense related to the notional amounts under all swap contracts is based on applicable fixed rates plus the applicable margin on the respective borrowings.

As of December 31, 2024, we had two interest rate swap contracts in place and one forward-starting interest rate swap contract, each of which has the effect of converting our exposure to variable interest rates on a portion of our variable rate borrowings to fixed interest rates. For more information, see Note 5 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K.

Compliance and Future Availability

As of December 31, 2024, we were in compliance with all 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 covenants and financial ratio requirements throughout 2025. For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

Future Obligations

We have certain fixed contractual obligations and commitments that include future estimated payments for general operating purposes. Changes in our business needs, fluctuating interest rates and other factors may result in actual payments differing from our estimates. We cannot provide certainty regarding the timing and amounts of these payments. 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, borrowings on our facilities and proceeds from any future refinancing transactions.

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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 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.

•Operating lease amounts include future rental payments for our operating leases. The amounts presented are consistent with contractual terms and are not expected to differ significantly from actual results under our existing leases. For additional information regarding our operating leases, see Note 9 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

•Purchase obligations include all legally binding contracts such as firm minimum commitments for inventory purchases and software commitments. We issue inventory purchase orders in the normal course of business, which represent authorizations to purchase that are cancellable by their terms. We do not consider our cancellable purchase orders to be firm inventory commitments; therefore, they are excluded from the table above.

For certain of our future obligations, such as unrecognized tax benefits, uncertainties exist regarding the timing of future payments and the amount by which these potential obligations will increase or decrease over time. As such, we have excluded unrecognized tax benefits from the table above. See Note 7 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K for additional discussion related to our unrecognized tax benefits. The table also excludes various other liabilities that are not contractual in nature, including contingent liabilities, litigation accruals and contract termination fees.

The table below contains estimated interest payments (in thousands) related to our long-term debt obligations presented in the table above.  We calculated estimates of future interest payments based on the December 31, 2024 outstanding debt balances, using the fixed rates under our interest rate swap agreements for the applicable notional amounts and the weighted average effective interest rates as of December 31, 2024 for the remaining outstanding balances not covered by our swap contracts.  To project the estimated interest expense to coincide with the time periods used in the table above, we projected the estimated debt balances for future years based on the scheduled maturity dates of the Credit Facility, the Term Facility and the Receivables Facility. Our actual interest payments could vary substantially from the amounts projected.

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