Latham Group, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our 2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 10, 2022 (the “Annual Report”). Cautionary Note Regarding Forward-Looking Statements This discussion contains forward-looking statements that involve risk, assumptions and uncertainties, such as statements of our plans, objectives, expectations, intentions and forecasts. These forward-looking statements are generally identified by the use of forward-looking terminology, including the terms “anticipate,” “believe,” “confident,” “continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and, in each case, their negative or other various or comparable terminology. Our actual results and the timing of selected events could differ materially from those discussed in these forward-looking statements as a result of several factors, including those set forth under the section of this Quarterly Report on Form 10-Q titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Important factors that could cause our results to vary from expectations include, but are not limited to secular shifts in consumer demand for swimming pools and spending on outdoor living spaces; slow pace of material conversion from concrete pools to fiberglass pools in the pool industry; general economic conditions and uncertainties affecting markets in which we operate and economic volatility that could adversely impact our business, including the COVID-19 pandemic; the impact of the war between the Russian Federation and Ukraine, including impact of sanctions imposed by Western governments; changes in access to consumer credit or increases in interest rates impacting consumers’ ability to finance their purchases of pools; the impact of weather on our business; our ability to attract new customers and retain existing customers; our ability to sustain further growth and to manage it effectively; the ability of our suppliers to continue to deliver the quantity or quality of materials sufficient to meet our needs to manufacture our products; the availability and cost of third-party transportation services for our products and raw materials; product quality issues; our ability to successfully defend litigation brought against us; our ability to adequately obtain, maintain, protect and enforce our intellectual property and proprietary rights and claims of intellectual property and proprietary right infringement, misappropriation or other violation by competitors and third parties; failure to hire and retain qualified employees and personnel; exposure to risks associated with international sales and operations, including foreign currency exchange rates, corruption and instability; security breaches, cyber-attacks and other interruptions to our and our third-party service providers’ technological and physical infrastructures; catastrophic events, including war, terrorism and other international conflicts, public health issues or natural catastrophes and accidents; risk of increased regulation of our operations, particularly related to environmental laws; fluctuations in our operating results; inability to compete successfully against current and future competitors; and other risks, uncertainties and factors set forth in this Quarterly Report on Form 10-Q, including those set forth under section titled “Risk Factors.” These forward-looking statements reflect our views with respect to future events as of the date of this Quarterly Report on Form 10-Q and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. Our forward-looking statements do not reflect the potential impact of any future acquisitions, merger, dispositions, joint ventures or investments we may undertake. We qualify all of our forward-looking statements by these cautionary statements. Overview We are the largest designer, manufacturer and marketer of in-ground residential swimming pools in North America, Australia and New Zealand. We hold the #1 market position in North America in every product category in which we compete. We believe that we are the most sought-after brand in the pool industry and the only pool company that has established a direct relationship with the homeowner. We are Latham, The Pool Company TM . 24 Table of Contents With an operating history that spans over 65 years, we offer the industry’s broadest portfolio of pools and related products, including in-ground swimming pools, pool liners and pool covers. We have a heritage of innovation. In an industry that has traditionally marketed on a business-to-business basis (pool manufacturer to dealer), we pioneered the first “direct-to-homeowner” digital and social marketing strategy that has transformed the homeowner’s purchase journey. Through this marketing strategy, we are able to create demand for our pools and generate and provide high quality, purchase-ready consumer leads to our dealer partners. Partnership with our dealers is integral to our collective success, and we have enjoyed long-tenured relationships averaging over 14 years. We support our dealer network with business development tools, co-branded marketing programs and in-house training, as well as an operations platform consisting of over 2,300 employees across over 30 facilities. The full resources of our company are dedicated to designing and manufacturing high-quality pool products with the homeowner in mind, and positioning ourselves as a value-added partner to our dealers. We conduct our business as one operating and reportable segment that designs, manufactures and markets in-ground swimming pools, liners and covers. Recent Developments Highlights for the fiscal quarter ended April 2, 2022 ● Increase in net sales of 28.8%, or $42.9 million, to $191.6 million for the fiscal quarter ended April 2, 2022, compared to $148.7 million for the fiscal quarter ended April 3, 2021. ● Increase in net loss of $11.3 million, to $2.8 million for the fiscal quarter ended April 2, 2022, compared to a net income of $8.5 million for the fiscal quarter ended April 3, 2021, representing an 1.5% net loss margin for the fiscal quarter ended April 2, 2022. ● Increase in Adjusted EBITDA (as defined below) of $14.5 million, to $48.0 million for the fiscal quarter ended April 2, 2022, compared to $33.5 million for the fiscal quarter ended April 3, 2021. Share Repurchase Program On May 10, 2022, we approved a stock repurchase program (the “Repurchase Program”), which authorized us to repurchase up to $100 million of our shares of common stock over the next three years. We may effect these repurchases in open market transactions, privately negotiated purchases or other acquisitions. We are not obligated to repurchase any of our shares of our common stock under the Repurchase Program and the timing and amount of any repurchases will depend on market conditions, our stock price, alternative uses of capital, the terms of our debt instruments and other factors. Debt Refinancing On February 23, 2022, we entered into an agreement (the “New Credit Agreement”) with Barclays Bank PLC, which provides a senior secured multicurrency revolving line of credit (the “New Revolving Credit Facility”) in an initial principal amount of $75.0 million and a U.S. Dollar senior secured term loan facility (the “New Term Loan Facility”) in an initial principal amount of $325.0 million (the “Refinancing”). On the closing date, proceeds under the agreement were used to repay $294.0 million and terminate the Credit Agreement (as defined below) and for general corporate purposes. Offering of Common Stock On January 11, 2022, we completed an offering of 13,800,000 shares of common stock, including the exercise in full by the underwriters of their option to purchase up to 1,800,000 additional shares of common stock, at a public offering price of $19.50 per share. We received proceeds of $257.7 million from this offering, net of $11.4 million of underwriting fees. The proceeds of $257.7 million were used to purchase 13,800,000 shares of common stock from certain of our stockholders, primarily investment funds 25 Table of Contents managed by Pamplona Capital Management LLC (“Pamplona”) and Wynnchurch Capital, L.P., and also a small percentage of shares of common stock owned by some of our directors and executive officers. Key Performance Indicators Net Sales We derive our revenue from the design, manufacture and sale of in-ground swimming pools, pool covers and liners. We sell fiberglass pools, which are one-piece manufactured fiberglass pools that are ready to be installed in a consumer’s backyard and custom vinyl pools, which are manufactured pools that are made out of non-corrosive steel or composite polymer frame, on top of which a vinyl liner is installed. We sell liners for the interior surface of vinyl pools (including pools that were not manufactured by us). We also sell all-season covers, which are winterizing mesh and solid pool covers that protect pools against debris and cold or inclement weather and automatic safety covers for pools that can be operated with a switch. Our sales are made through one-step and two-step business-to-business distribution channels. In our one-step distribution channel, we sell our products directly to dealers who, in turn, sell our products to consumers. In our two-step distribution channel, we sell our products to distributors who warehouse our products and sell them on to dealers, who ultimately sell our products to consumers. Each product shipped is considered to be one performance obligation. With the exception of our extended service warranties and our custom product contracts, we recognize our revenue when control of our promised goods is transferred to our customers, either upon shipment or arrival at our customer’s destination depending upon the terms of the purchase order. Sales are recognized net of any estimated rebates, cash discounts or other sales incentives. Revenue that is derived from our extended service warranties, which are separately priced and sold, is recognized over the term of the contracts. Revenue from custom products is recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation. Gross Margin Gross margin is gross profit as a percentage of our net sales. Gross margin is dependent upon several factors, such as changes in prices of raw materials, the volume and relative sales mix among product lines, the average price of our products sold and plant performance, among other factors. Gross margin is also impacted by the costs of distribution and occupancy costs, which can vary. Our gross profit is variable in nature and generally follows changes in net sales. The components of our cost of sales may not be comparable to the components of cost of sales or similar measures of other companies. As a result, our gross profit and gross margin may not be comparable to similar data made available by other companies. Adjusted EBITDA and Adjusted EBITDA Margin We use Adjusted EBITDA and Adjusted EBITDA margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to establish our annual management incentive bonus plan compensation and to compare our performance against that of other peer companies using similar measures. We define Adjusted EBITDA as net income (loss) plus (i) depreciation and amortization, (ii) interest expense, (iii) income tax (benefit) expense, (iv) loss on sale and disposal of property and equipment, (v) restructuring charges, (vi) stock-based compensation expense, (vii) unrealized (gains) losses on foreign currency transactions, (viii) strategic initiative costs, (ix) acquisition and integration related costs, (x) loss on extinguishment of debt, (xi) other, (xii) underwriting fees related to offering of common stock and (xiii) IPO costs. We believe excluding these items allows for better comparison of our financial results across reporting periods. We define Adjusted EBITDA margin as Adjusted EBITDA divided by net sales. Our definitions of Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to similarly titled measures of other companies. For a discussion of Adjusted EBITDA and Adjusted EBITDA margin and the limitations on their use, and the reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure, and our calculation of Adjusted EBITDA margin see “—Non-GAAP Financial Measures” below. ​ 26 Table of Contents Results of Operations Fiscal Quarter Ended April 2, 2022 Compared to Fiscal Quarter Ended April 3, 2021 The following table summarizes our results of operations for the fiscal quarters ended April 2, 2022 and April 3, 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended ​ ​ ​ ​ ​ % of Net ​ ​ ​ ​ % of Net ​ Change ​ Change % ​ April 2, 2022 Sales April 3, 2021 Sales Amount of Net Sales ​ (dollars in thousands) ​ Net sales ​ $ 191,614 100.0 % $ 148,746 100.0 % $ 42,868 0.0 % Cost of sales ​ 120,960 63.1 % 96,306 64.7 % 24,654 (1.6) % Gross profit ​ 70,654 36.9 % 52,440 35.3 % 18,214 1.6 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Selling, general and administrative expense ​ 45,225 23.6 % 27,172 18.3 % 18,053 5.3 % Underwriting fees related to offering of common stock ​ ​ 11,437 ​ 6.0 % ​ — ​ — % ​ 11,437 ​ 6.0 % Amortization ​ 7,192 3.8 % 5,595 3.8 % 1,597 0.0 % Income from operations ​ 6,800 3.5 % 19,673 13.2 % (12,873) (9.7) % Other expense (income): ​ ​ ​ ​ ​ ​ ​ ​ Interest expense ​ 1,765 0.9 % 9,056 6.1 % (7,291) (5.2) % Loss on extinguishment of debt ​ ​ 3,465 ​ 1.8 % ​ — ​ — % ​ 3,465 ​ 1.8 % Other (income) expense, net ​ (355) (0.2) % (555) (0.4) % 200 0.2 % Total other expense, net ​ 4,875 2.5 % 8,501 5.7 % (3,626) (3.2) % Earnings from equity method investment ​ 542 0.3 % 244 0.2 % 298 0.1 % Income before income taxes ​ 2,467 1.3 % 11,416 7.7 % (8,949) (6.4) % Income tax expense ​ 5,307 2.8 % 2,883 2.0 % 2,424 0.8 % Net (loss) income ​ $ (2,840) (1.5) % $ 8,533 5.7 % $ (11,373) (7.2) % Adjusted EBITDA (a) ​ $ 47,962 25.0 % $ 33,520 22.5 % $ 14,442 2.5 % (a) Adjusted EBITDA is a non-GAAP measure. See “Non-GAAP Measures” for a reconciliation to net (loss) income, the most directly comparable GAAP measure, and for information regarding our use of Adjusted EBITDA. Net Sales Net sales was $191.6 million for the fiscal quarter ended April 2, 2022, compared to $148.7 million for the fiscal quarter ended April 3, 2021. The $42.9 million, or 28.8%, increase in net sales was due to a $7.3 million increase from volume and a $35.6 million increase from pricing. The $35.6 million price increase reflects the impact of pricing actions to address inflationary pressures. The increase in total net sales of $42.9 million across our product lines was $18.2 million for in-ground swimming pools, $16.2 million for liners and $8.5 million for covers. Cost of Sales and Gross Margin Cost of sales was $121.0 million for the fiscal quarter ended April 2, 2022, compared to $96.3 million for the fiscal quarter ended April 3, 2021. Gross margin increased by 1.6%, to 36.9% of net sales for the fiscal quarter ended April 2, 2022 compared to 35.3% of net sales for the fiscal quarter ended April 3, 2021. The $24.7 million, or 25.6%, increase in cost of sales was primarily the result of the overall increase in sales volume, cost inflation and $1.2 million of non-cash stock-based compensation expense. The 1.6% increase in gross margin was primarily driven by benefits from pricing actions to address inflation, improved resin supply, benefits from the build of inventory, partially offset by negative fixed cost leverage due to investments to support future growth. Selling, General and Administrative Expense Selling, general and administrative expense was $45.2 million for the fiscal quarter ended April 2, 2022, compared to $27.2 million for the fiscal quarter ended April 3, 2021, and increased as a percentage of net sales by 5.3%. The $18.0 million, or 66.4%, increase in selling, general and administrative expense was primarily due to a $14.3 million increase in stock-based compensation 27 Table of Contents expense, $0.8 million in wages from an increase in headcount, particularly for customer-facing activities to support future business growth, and ongoing public company costs. Underwriting Fees Related to Offering of Common Stock Underwriting fees related to our offering of common stock were $11.4 million for the fiscal quarter ended April 2, 2022, related to the offering that was completed in January 2022. Amortization Amortization was $7.2 million for the fiscal quarter ended April 2, 2022, compared to $5.6 million for the fiscal quarter ended April 3, 2021. The $1.6 million, or 28.5%, increase in amortization was due to the increase in our definite-lived intangible assets resulting from our acquisition of Radiant in November 2021. Interest Expense Interest expense was $1.8 million for the fiscal quarter ended April 2, 2022, compared to $9.1 million for the fiscal quarter ended April 3, 2021. The $7.3 million, or 80.5%, decrease in interest expense was primarily due to a decrease in the average outstanding balance of long-term debt, lower amortization of deferred financing costs and debt discount and a lower effective interest rate, compared to the fiscal quarter ended April 3, 2021. In addition, interest expense for the fiscal quarter ended April 2, 2022 was partially offset by an unrealized gain of $2.8 million related to the change in fair value of our interest rate swap. Loss on Extinguishment of Debt Loss on extinguishment of debt was $3.5 million for the fiscal quarter ended April 2, 2022, compared to none for the fiscal quarter ended April 3, 2021 as the Refinancing was completed in February 2022. Other (Income) Expense, Net Other (income) expense, net was ($0.4) million for the fiscal quarter ended April 2, 2022, compared to ($0.6) million for the fiscal quarter ended April 3, 2021. The $0.2 million decrease in other income was primarily due an unfavorable change in net foreign currency transaction gains and losses associated with our international subsidiaries. Earnings from Equity Method Investment Earnings from equity method investment of Premier Pools & Spa was $0.5 million for the fiscal quarter ended April 2, 2022, compared to $0.2 million for the fiscal quarter ended April 3, 2021, primarily due to the financial performance of Premier Pools & Spa. Income Tax Expense Income tax expense was $5.3 million for the fiscal quarter ended April 2, 2022, compared to $2.9 million for the fiscal quarter ended April 3, 2021. Our effective tax rate was 215.1% for the fiscal quarter ended April 2, 2022, compared to 25.3% for the fiscal quarter ended April 3, 2021. The difference between the U.S. federal statutory income tax rate and our effective income tax rate for the fiscal quarter ended April 2, 2022 was primarily attributable to the discrete impact of stock compensation expense for which there is no associated tax benefit. The difference between the U.S. federal statutory income tax rate and our effective income tax rate for the fiscal quarter ended April 3, 2021 was impacted by a variety of factors, primarily the impact of state taxes. Net (Loss) Income Net loss was $2.8 million for the fiscal quarter ended April 2, 2022, compared to $8.5 million of net income for the fiscal quarter ended April 3, 2021. The $11.3 million, or 133.3%increase in net loss was primarily due to the factors described above. 28 Table of Contents Net (Loss) Income Margin Net loss margin was 1.5% for the fiscal quarter ended April 2, 2022, compared to net income margin of 5.7% for the fiscal quarter ended April 2, 2022. The 7.2% increase in net loss margin was due to a $11.3 million increase in net loss and a $42.9 million increase in net sales, compared to the fiscal quarter ended April 3, 2021 due to the factors described above. Adjusted EBITDA Adjusted EBITDA was $48.0 million for the fiscal quarter ended April 2, 2022, compared to $33.5 million for the fiscal quarter ended April 3, 2021. The $14.5 million, or 43.1%, increase in Adjusted EBITDA was primarily due to the increase in net sales. Adjusted EBITDA Margin Adjusted EBITDA margin was 25.0% for the fiscal quarter ended April 2, 2022, compared to 22.5% for the fiscal quarter ended April 3, 2021. The 2.5% increase in Adjusted EBITDA margin was primarily due to a $14.5 million increase in Adjusted EBITDA and a $42.9 million increase in net sales, compared to the fiscal quarter ended April 3, 2021. Non-GAAP Financial Measures Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA and Adjusted EBITDA margin are key metrics used by management and our board of directors to assess our financial performance. Adjusted EBITDA and Adjusted EBITDA margin are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures. We use Adjusted EBITDA and Adjusted EBITDA margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other companies using similar measures. We have presented Adjusted EBITDA and Adjusted EBITDA margin solely as supplemental disclosures because we believe they allow for a more complete analysis of results of operations and assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, such as (i) depreciation and amortization, (ii) interest expense, (iii) income tax (benefit) expense, (iv) loss on sale and disposal of property and equipment, (v) restructuring charges, (vi) stock-based compensation expense, (vii) unrealized (gains) losses on foreign currency transactions, (viii) strategic initiative costs, (ix) acquisition and integration related costs, (x) loss on extinguishment of debt, (xi) other, (xii) underwriting fees related to offering of common stock and (xiii) IPO costs. Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and should not be considered as alternatives to net income as a measure of financial performance or any other performance measure derived in accordance with GAAP, and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA and Adjusted EBITDA margin, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. There can be no assurance that we will not modify the presentation of Adjusted EBITDA and Adjusted EBITDA margin following this offering, and any such modification may be material. Our presentation of Adjusted EBITDA and Adjusted EBITDA margin should not be construed to imply that our future results will be unaffected by any such adjustments. In addition, other companies, including companies in our industry, may not calculate Adjusted EBITDA and Adjusted EBITDA margin at all or may calculate Adjusted EBITDA and Adjusted EBITDA margin differently and accordingly, are not necessarily comparable to similarly entitled measures of other companies, which reduces the usefulness of Adjusted EBITDA and Adjusted EBITDA margin as tools for comparison. Adjusted EBITDA and Adjusted EBITDA margin have their limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Adjusted EBITDA and Adjusted EBITDA margin: ● do not reflect every expenditure, future requirements for capital expenditures or contractual commitments; ● do not reflect changes in our working capital needs; 29 Table of Contents ● do not reflect the interest expense, or the amounts necessary to service interest or principal payments, on our outstanding debt; ● do not reflect income tax (benefit) expense, and because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and ability to operate; ● do not reflect non-cash equity compensation, which will remain a key element of our overall equity-based compensation package; and ● do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations. Although depreciation and amortization are eliminated in the calculation of Adjusted EBITDA and Adjusted EBITDA margin, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA and Adjusted EBITDA margin do not reflect any costs of such replacements. Management compensates for these limitations by primarily relying on our GAAP results, while using Adjusted EBITDA and Adjusted EBITDA margin as supplements to the corresponding GAAP financial measures. The following table provides a reconciliation of our net income to Adjusted EBITDA for the periods presented and the calculation of Adjusted EBITDA margin: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended ​ ​ April 2, 2022 April 3, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ Net (loss) income ​ $ (2,840) ​ $ 8,533 ​ Depreciation and amortization ​ ​ 9,494 ​ ​ 7,900 ​ Interest expense ​ ​ 1,765 ​ ​ 9,056 ​ Income tax expense ​ ​ 5,307 ​ ​ 2,883 ​ Loss on sale and disposal of property and equipment ​ ​ — ​ ​ 165 ​ Restructuring charges(a) ​ ​ 13 ​ ​ 371 ​ Stock-based compensation(b) ​ ​ 16,925 ​ ​ 1,464 ​ Unrealized (gains) losses on foreign currency transactions(c) ​ ​ (4) ​ ​ (61) ​ Strategic initiative costs(d) ​ ​ 1,818 ​ ​ — ​ Acquisition and integration related costs(e) ​ ​ 257 ​ ​ 68 ​ Loss on extinguishment of debt (f) ​ ​ 3,465 ​ ​ — ​ Other(g) ​ ​ 325 ​ ​ 264 ​ Underwriting fees related to offering of common stock (h) ​ ​ 11,437 ​ ​ — ​ IPO Costs(i) ​ ​ — ​ ​ 2,877 ​ Adjusted EBITDA ​ $ 47,962 ​ $ 33,520 ​ Net sales ​ $ 191,614 ​ $ 148,746 ​ Net (loss) income margin ​ ​ (1.5) % ​ 5.7 % Adjusted EBITDA margin ​ ​ 25.0 % ​ 22.5 % (a) Represents severance and other costs for our executive management changes. (b) Represents non-cash stock-based compensation expense. (c) Represents unrealized foreign currency transaction (gains) and losses associated with our international subsidiaries. (d) Represents fees paid to external consultants for our strategic initiatives. (e) Represents acquisition and integration costs primarily related to the acquisition of Radiant, the equity investment in Premier Pools & Spas, as well as other costs related to potential transactions. (f) Represents the loss on extinguishment of debt in connection with our Refinancing. (g) Other costs consist of other discrete items as determined by management, primarily including (i) fees paid to external advisors for various matters, (ii) non-cash adjustments to record the step-up in the fair value of inventory related to the acquisitions of GL 30 Table of Contents International, LLC and Radiant, which are amortized through cost of sales in the condensed consolidated statements of operations, and (iii) other items. (h) Represents underwriting fees related to our offering of common stock that was completed in January 2022. (i) These expenses are primarily composed of legal, accounting and professional fees incurred in connection with our initial public offering that are not capitalizable, which are included within selling, general and administrative expense. Liquidity and Capital Resources Overview Our primary sources of liquidity are net cash provided by operating activities and availability under our New Revolving Credit Facility. Historically, we have funded working capital requirements, capital expenditures, payments related to acquisitions, and debt service requirements with internally generated cash on hand and through our term loan and revolving credit facilities (as defined below under “—Our Indebtedness”) and through the issuance of shares of our common stock. Our primary cash needs are to fund working capital, capital expenditures, debt service requirements and any acquisitions we may undertake. As of April 2, 2022, we had $18.7 million of cash, $324.1 million of outstanding borrowings and an additional $65.0 million of availability under our New Revolving Credit Facility, which was undrawn. Our primary working capital requirements are for the purchase of inventory, payroll, rent, facility costs and other selling, general and administrative costs. Our working capital requirements fluctuate during the year, driven primarily by seasonality and the timing of raw material purchases. Our capital expenditures are primarily related to growth, including production capacity, storage and delivery equipment. We are in the midst of a multi-year capital plan to invest in our facilities, technology and systems, including investments to expand our fiberglass manufacturing capacity. We expect to fund these capital expenditures from net cash provided by operating activities. We believe that our existing cash, cash generated from operations and availability under our New Revolving Credit Facility, will be adequate to fund our operating expenses and capital expenditure requirements over the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. Our Indebtedness On February 23, 2022, Latham Pool Products, Inc. (“Latham Pool Products”), our wholly owned subsidiary, entered into the New Credit Agreement with Barclays Bank PLC, which provides a senior secured multicurrency revolving line of credit in an initial principal amount of $75.0 million and a U.S. Dollar senior secured term loan facility in an initial principal amount of $325.0 million. On the closing date, proceeds under the agreement were used to repay and replace $294.0 million under, and terminate, the Credit Agreement (as defined below) and for general corporate purposes. New Revolving Credit Facility The New Revolving Credit Facility may be utilized to finance ongoing general corporate and working capital needs and permits Latham Pools Products to borrow loans in U.S. Dollars, Canadian Dollars, Euros and Australian Dollars. The New Revolving Credit Facility matures on February 23, 2027. Loans outstanding under the New Revolving Credit Facility denominated in U.S. Dollars and Canadian Dollars bear interest, at the borrower’s option, at a rate per annum based on Term SOFR or CDO (each, as defined in the New Credit Agreement), as applicable, plus a margin of 3.50%, or at a rate per annum based on the Base Rate or the Canadian Prime Rate (each, as defined in the New Credit Agreement), plus a margin of 2.50%. Loans outstanding under the New Revolving Credit Facility denominated in Euros or Australian Dollars bear interest based on EURIBOR or the AUD Rate (each, as defined in the New Credit Agreement), respectively, plus a margin of 3.50%. A commitment fee accrues on any unused portion of the commitments under the New Revolving Credit Facility. The commitment fee is due and payable quarterly in arrears and is, initially, 0.375% per annum and will, thereafter, accrue at a rate per annum ranging from 0.25% to 0.50%, depending on the First Lien Net Leverage Ratio. The New Revolving Credit Facility is not subject to amortization. We are also required to meet certain financial covenants, including maintaining specific liquidity measurements. There are also negative covenants, including certain restrictions on our ability to incur additional indebtedness, create liens, make investments, consolidate or merge with other entities, enter into transactions with affiliates, make prepayments with respect to certain indebtedness and make restricted payments and other distributions. 31 Table of Contents As of April 2, 2022 we had $10.0 million of outstanding borrowings under the New Revolving Credit Facility. New Term Loan Facility The New Term Loan matures on February 23, 2029. Loans outstanding under the New Term Loan bear interest, at the borrower’s option, at a rate per annum based on Term SOFR (as defined in the New Credit Agreement), plus a margin ranging from 3.75% to 4.00%, depending on the First Lien Net Leverage Ratio (as defined in the New Credit Agreement, the “First Lien Net Leverage Ratio”), or based on the Base Rate (as defined in the New Credit Agreement), plus a margin ranging from 2.75% to 3.00%, depending on the First Lien Net Leverage Ratio. Loans under the New Term Loan are subject to scheduled quarterly amortization payments equal to 0.25% of the initial principal amount of the New Term Loan. The obligations under the New Credit Agreement are guaranteed by certain of our wholly owned subsidiaries as defined in the security agreement. The obligations under the New Credit Agreement are secured by substantially all of the guarantors’ tangible and intangible assets, including, but not limited to, their accounts receivables, equipment, intellectual property, inventory, cash and cash equivalents, deposit accounts and security accounts. The New Credit Agreement also restricts payments and other distributions unless certain conditions are met, which could restrict our ability to pay dividends. As of April 2, 2022 we had $314.1 million of outstanding borrowings under the New Term Loan. As of April 2, 2022, we were in compliance with all covenants under the New Revolving Credit Facility and the New Term Loan. Revolving Credit Facility On December 18, 2018, Latham Pool Products entered into an agreement (the “Credit Agreement”) with Nomura Corporate Funding Americas, LLC that included a revolving line of credit (the “Revolver”) and letters of credit (“Letters of Credit” or collectively with the Revolver, the “Revolving Credit Facility”), as well as a Term Loan (as described and defined below). The Revolving Credit Facility was utilized to finance ongoing general corporate and working capital needs with the Revolver of up to $30.0 million. The Revolving Credit Facility was terminated in connection with the Refinancing. Term Loan Facility Pursuant to the Credit Agreement, Latham Pool Products also borrowed $215.0 million in term loans (the “Term Loan”). The Term Loan was amended on May 29, 2019, to provide additional borrowings of $23.0 million, which was accounted for as a modification to the Term Loan, to fund our acquisition of Narellan Group Pty Limited and its subsidiaries (the “First Amendment”). On October 14, 2020, we amended the First Amendment to provide additional borrowings of $20.0 million, which was accounted for as new debt (the “Second Amendment”). The Second Amendment was further amended on January 25, 2021, to provide an additional incremental term loan of $175.0 million (the “Third Amendment”). On January 25, 2021, Latham Pool Products borrowed the incremental term loan, and the proceeds were used on February 2, 2021 to purchase and retire equity interests and to pay a distribution. On March 31, 2021, we amended our Term Loan to revise the applicable reporting requirements (the “Fourth Amendment”). On November 24, 2021, we amended the Term Loan to provide additional borrowings of $50.0 million (the “Fifth Amendment”). The proceeds from this incremental term loan were used to finance the Radiant Acquisition in part. The Term Loan, collectively with the First Amendment, Second Amendment, Third Amendment, the Fourth Amendment and the Fifth Amendment, is referred to as the “Amended Term Loan.” The Amended Term Loan was terminated in connection with the Refinancing. ​ 32 Table of Contents Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended ​ April 2, 2022 April 3, 2021 ​ ​ (in thousands) Net cash used in operating activities ​ $ (57,468) ​ $ (41,047) Net cash used in investing activities ​ (6,666) ​ (4,608) Net cash provided by financing activities ​ 39,251 ​ 6,083 Effect of exchange rate changes on cash ​ (411) ​ 207 Net decrease in cash ​ $ (25,294) ​ $ (39,365) ​ Operating Activities During the fiscal quarter ended April 2, 2022, operating activities used $57.5 million of cash. Net income, after adjustments for non-cash items, provided cash of $38.6 million. Cash used in operating activities was further driven by changes in our operating assets and liabilities, which used $96.1 million. Net cash used in changes in our operating assets and liabilities for the fiscal quarter ended April 2, 2022 consisted primarily of a $78.9 million increase in trade receivables, a $30.5 million increase in inventories, a $0.8 million increase in prepaid expenses and other current assets, a $0.3 million increase in other assets, a $3.2 million decrease in accrued expenses and other current liabilities, partially offset by a $17.5 million increase in accounts payable, and a $0.3 million increase in other long-term liabilities. The change in trade receivables was primarily due to the timing of, and increase in, net sales, and the increase in inventories was primarily due to a strategic decision to carry more inventory in an attempt to minimize the impact of any supply chain interruptions as well as higher costs. The changes in accrued expenses and other current liabilities and accounts payable were primarily due to volume of purchases and timing of payments. During the fiscal quarter ended April 3, 2021, operating activities used $41.0 million of cash. Net income, after adjustments for non-cash items, provided cash of $22.1 million. Cash used in operating activities was further driven by changes in our operating assets and liabilities, which used $63.1 million. Net cash provided by changes in our operating assets and liabilities for the fiscal quarter ended April 3, 2021 consisted primarily of a $61.0 million increase in trade receivables, a $9.2 million increase in inventories, a $2.1 increase in income tax receivable, and a $4.1 decrease in accrued expenses and other current liabilities, partially offset by a $8.6 million increase in accounts payable and a $4.5 million increase in other long-term liabilities. The change in trade receivables was primarily due to the timing of, and increase in, net sales, and the increase in inventories was primarily due to increased production and inventory build in response to existing and anticipated customer demand. The change in income tax receivable was due to estimated tax payments made in excess of the actual annual tax provision. The changes in accrued expenses and other current liabilities and accounts payable were primarily due to the decrease and timing of payments for rebate accruals. Investing Activities During the fiscal quarter ended April 2, 2022, investing activities used $6.7 million of cash, consisting of purchases of property and equipment. The purchase of property and equipment was primarily to expand capacity for inventory production in order to meet increasing customer demand. During the fiscal quarter ended April 3, 2021, investing activities used $4.6 million of cash, consisting of purchases of property and equipment. The purchase of property and equipment was to expand capacity for inventory production in order to meet increasing customer demand. Financing Activities During the fiscal quarter ended April 2, 2022, financing activities provided $39.3 million of cash, primarily consisting of proceeds from long-term debt borrowings in connection with the Refinancing of $320.1 million, proceeds from the sale of common stock of $257.7 million and borrowings on revolving credit facilities of $20.0 million, partially offset by repayments on long-term debt borrowings of $284.0 million, the repurchase and retirement of common stock of $257.7 million, repayments on revolving credit facility borrowings of $10.0 million, and deferred financing fees paid of $6.9 million. 33 Table of Contents During the fiscal quarter ended April 3, 2021, financing activities provided $6.1 million of cash, primarily consisting of proceeds from borrowings on the term loan of $172.8 million and borrowings on the revolving credit facility of $16.0 million, partially offset by the repurchase of common stock of $64.9 million, dividends to Class A unitholders of $110.0 million, and payments on long-term debt borrowings of $5.8 million. Contractual Obligations There have been no material changes, outside of the ordinary course of business, to our contractual obligations during the fiscal quarter ended April 2, 2022 from those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” in our Annual Report. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. Throughout the preparation of these financial statements, we have made estimates and assumptions that impact the reported amounts of assets, liabilities and the disclosure of contingent liabilities at the date of the financial statements and revenues and expenses during the reporting period. Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report. These estimates are based on historical results, trends and other assumptions we believe to be reasonable. We evaluate these estimates on an ongoing basis. Actual results may differ from estimates. For additional information about our critical accounting policies and estimates, see the disclosure included in our Annual Report as well as Note 2 - Summary of Significant Accounting Policies in the notes to the condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. Recently Issued and Adopted Accounting Pronouncements A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.