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Item 2. Management’s Discussion and Analysis

2022-08-11 compared with 2022-05-12 · 155 added, 97 removed, 214 unchanged (54% of the section changed)

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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.

Certain statements in this report are forward-looking statements that involve risk, assumptions and uncertainties, such as statements of our plans, objectives, expectations, intentions and forecasts.

In addition, our management may from time to time make oral forward-looking statements.

All statements, other than statements of historical facts, are forward-looking statements.

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.

Our actual results and the timing of selected events could differ materially from those discussed in these forward-looking statements as a result of various 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, negatively or positively, 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;

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 and inflation;

the impact of the war between the Russian Federation and Ukraine, including impact of sanctions imposed by Western governments;

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the impact of weather on our business;

our ability to attract new customers and retain existing customers;

our ability to attract new customers and retain existing customers, including the ability to generate additional potential sales leads for our dealers and the ability to convert leads generated into ultimate sales of products to consumers;

our ability to sustain further growth and to manage it effectively;

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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 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 .

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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.

Highlights for the fiscal quarter ended

● Increase in net sales of 14.3%, or $25.9 million, to $206.8 million for the fiscal quarter ended July 2, 2022, compared to $180.9 million for the fiscal quarter ended July 3, 2021.

● Increase in net income of $57.9 million, to $4.3 million for the fiscal quarter ended July 2, 2022, compared to a net loss of $53.6 million for the fiscal quarter ended July 3, 2021, representing an 2.1% net income margin for the fiscal quarter ended July 2, 2022.

● Increase in Adjusted EBITDA (as defined below) of $5.9 million, to $48.7 million for the fiscal quarter ended July 2, 2022, compared to $42.8 million for the fiscal quarter ended July 3, 2021.

Highlights for the two fiscal quarters ended

● Increase in net sales of 20.9%, or $68.8 million, to $398.4 million for the two fiscal quarters ended July 2, 2022, compared to $329.6 million for the two fiscal quarters ended July 3, 2021.

● Increase in net income of $46.6 million, to $1.5 million for the two fiscal quarters ended July 2, 2022, compared to a net loss of $45.1 million for the two fiscal quarters ended July 3, 2021, representing an 0.4% net income margin for the two fiscal quarters ended July 2, 2022.

● Increase in Adjusted EBITDA of $20.2 million, to $96.6 million for the two fiscal quarters ended July 2, 2022, compared to $76.4 million for the two fiscal quarters ended July 3, 2021.

Share Repurchase Program

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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

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.

During the fiscal quarter ended July 2, 2022, we repurchased and

concurrently retired 2,026,231 shares of the Company’s common stock for an aggregate amount of $15.0 million, pursuant to the Repurchase Program.

As of July 2, 2022, approximately $85.0 million remained available for share repurchases pursuant to our Repurchase Program.

Key Performance Indicators

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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.

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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 July 2, 2022 Compared to Fiscal Quarter Ended July 3, 2021

The following table summarizes our results of operations for the fiscal quarter ended July 2, 2022 and July 3, 2021:

Fiscal Quarter Ended

April 2, 2022

April 3, 2021

(dollars in thousands)

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Selling, general and administrative expense

Income (loss) from operations

Other expense (income):

Interest expense

Other expense (income), net

Total other expense, net

Earnings from equity method investment

Income (loss) before income taxes

Income tax expense

Net income (loss)

Adjusted EBITDA (a)

(a) Adjusted EBITDA is a non-GAAP measure.

See “Non-GAAP Measures” for a reconciliation to net income (loss), the most directly comparable GAAP measure, and for information regarding our use of Adjusted EBITDA.

Net sales was $206.8 million for the fiscal quarter ended July 2, 2022, compared to $180.9 million for the fiscal quarter ended July 3, 2021.

The $25.9 million, or 14.3%, increase in net sales was due to a $8.3 million decrease from volume and a $34.2 million increase from pricing.

The $34.2 million price increase reflects the impact of pricing actions to address inflationary pressures.

The $8.3 million volume decrease was largely in packaged pools, which were impacted by destocking in the wholesale distribution channel as a result of the current macro-economic environment and more days of unseasonable weather in certain regions limiting installation days.

The increase in total net sales of $25.9 million across our product lines was $4.2 million for in-ground swimming pools, $9.6 million for liners and $12.1 million for covers.

Cost of Sales and Gross Margin

Cost of sales was $139.2 million for the fiscal quarter ended July 2, 2022, compared to $122.5 million for the fiscal quarter ended July 3, 2021.

Gross margin increased by 0.4%, to 32.7% of net sales for the fiscal quarter ended July 2, 2022 compared to 32.3% of net sales for the fiscal quarter ended July 3, 2021.

The $16.7 million, or 13.6%, increase in cost of sales was primarily the result of cost inflation, partially offset by a $3.8 million decrease in non-cash stock-based compensation expense.

The 0.4% increase in gross margin was primarily driven by benefits from pricing actions to address inflation, benefits from the build of inventory, and lower non-cash stock-based compensation expense, partially offset by negative fixed cost leverage due to investments to support future growth, including fiberglass expansion initiatives.

Selling, General and Administrative Expense

Selling, general and administrative expense was $41.8 million for the fiscal quarter ended July 2, 2022, compared to $95.3 million for the fiscal quarter ended July 3, 2021, and decreased as a percentage of net sales by 32.5%.

The $53.5 million, or 56.1%, decrease in selling, general and administrative expense was primarily due to a $55.3 million decrease in non-cash stock-based compensation expense, a $1.1 million decrease due to the absence of the costs incurred in prior year as a result of going public, partially offset by an increase in wages and related expenses.

Amortization was $7.2 million for the fiscal quarter ended July 2, 2022, compared to $5.5 million for the fiscal quarter ended July 3, 2021.

The $1.7 million, or 30.6%, increase in amortization was due to the increase in our definite-lived intangible assets resulting from our acquisition of Trojan Leisure Products, LLC d/b/a Radiant Pools (“Radiant”) in November 2021.

Interest Expense

Interest expense was $3.2 million for the fiscal quarter ended July 2, 2022, compared to $7.5 million for the fiscal quarter ended July 3, 2021.

The $4.3 million, or 57.9%, decrease in interest expense was primarily due to lower amortization of deferred financing costs and debt discount and a lower effective interest rate, compared to the fiscal quarter ended July 3, 2021.

In addition, interest expense for the fiscal quarter ended July 2, 2022 was partially offset by an unrealized gain of $1.1 million related to the change in fair value of our interest rate swap.

Other Expense (Income), Net

Other expense (income), net was $0.9 million for the fiscal quarter ended July 2, 2022, compared to ($0.8) million for the fiscal quarter ended July 3, 2021.

The $1.7 million increase in other expense 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 $0.7 million for the fiscal quarter ended July 2, 2022, compared to $0.8 million for the fiscal quarter ended July 3, 2021, primarily due to our reduced ownership interest during the fiscal quarter ended July 2, 2022 as compared to the fiscal quarter ended July 3, 2021, partially offset by the financial performance of Premier Pools & Spa.

Income Tax Expense

Income tax expense was $11.0 million for the fiscal quarter ended July 2, 2022, compared to $5.2 million for the fiscal quarter ended July 3, 2021.

Our effective tax rate was 71.9% for the fiscal quarter ended July 2, 2022, compared to (10.8)% for the fiscal quarter ended July 3, 2021.

The difference between the U.S.

federal statutory income tax rate and our effective income tax rate for the fiscal quarter ended July 2, 2022 was primarily attributable to the discrete impact of stock-based 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 July 3, 2021 was primarily attributable to the discrete impact of stock-based compensation expense for which there is no associated tax benefit.

Net Income (Loss)

Net income was $4.3 million for the fiscal quarter ended July 2, 2022, compared to $53.6 million of net loss for the fiscal quarter ended July 3, 2021.

The $57.9 million, or 108.0%, increase in net income was primarily due to the factors described above.

Net Income (Loss) Margin

Net income margin was 2.1% for the fiscal quarter ended July 2, 2022, compared to net loss margin of 29.6% for the fiscal quarter ended July 2, 2022.

The 31.7% increase in net income margin was due to a $57.9 million increase in net income and a $25.9 million increase in net sales, compared to the fiscal quarter ended July 3, 2021 due to the factors described above.

Adjusted EBITDA

Adjusted EBITDA was $48.7 million for the fiscal quarter ended July 2, 2022, compared to $42.8 million for the fiscal quarter ended July 3, 2021.

The $5.9 million, or 13.5%, increase in Adjusted EBITDA was primarily due to the increase in net sales, as well as the other factors described above.

Adjusted EBITDA Margin

Adjusted EBITDA margin was 23.5% for the fiscal quarter ended July 2, 2022, compared to 23.7% for the fiscal quarter ended July 3, 2021.

The 0.2% decrease in Adjusted EBITDA margin was primarily due to a $5.9 million increase in Adjusted EBITDA and a $25.9 million increase in net sales, compared to the fiscal quarter ended July 3, 2021, as well as the other factors described above.

Two Fiscal Quarters Ended July 2, 2022 Compared to Two Fiscal Quarters Ended July 3, 2021

The following table summarizes our results of operations for the two fiscal quarters ended July 2, 2022 and July 3, 2021:

Two Fiscal Quarters Ended

(dollars in thousands)

Cost of sales

Selling, general and administrative expense

Underwriting fees related to offering of common stock

Income from operations

Income (loss) from operations

Other expense (income):

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Loss on extinguishment of debt

Other (income) expense, net

Other expense (income), net

Total other expense, net

Earnings from equity method investment

Income before income taxes

Income (loss) before income taxes

Income tax expense

Net (loss) income

Net income (loss)

Adjusted EBITDA (a)

(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 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.

See “Non-GAAP Measures” for a reconciliation to net income (loss), the most directly comparable GAAP measure, and for information regarding our use of Adjusted EBITDA.

Net sales was $398.4 million for the two fiscal quarters ended July 2, 2022, compared to $329.6 million for two fiscal quarters ended July 3, 2021.

The $68.8 million, or 20.9%, increase in net sales was due to a $0.9 million decrease from volume and a $69.7 million increase from pricing.

The $69.7 million price increase reflects the impact of pricing actions to address inflationary pressures.

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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.

Cost of sales was $260.2 million for the two fiscal quarters ended July 2, 2022, compared to $218.8 million for the two fiscal quarters ended July 3, 2021.

Gross margin increased by 1.1%, to 34.7% of net sales for the two fiscal quarters ended July 2, 2022 compared to 33.6% of net sales for the two fiscal quarters ended July 3, 2021.

The $41.4 million, or 18.9%, increase in cost of sales was primarily the result of cost inflation, partially offset by a $2.6 million decrease in non-cash stock-based compensation expense.

The 1.1% increase in gross margin was primarily driven by benefits from pricing actions to address inflation, benefits from the build of inventory, and lower non-cash stock-based compensation expense, 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

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.

Selling, general and administrative expense was $87.0 million for the two fiscal quarters ended July 2, 2022, compared to $122.5 million for the two fiscal quarters ended July 3, 2021, and decreased as a percentage of net sales by 15.4%.

The $35.5 million, or 28.9%, decrease in selling, general and administrative expense was primarily due to a $41.0 million decrease in non-cash stock-based compensation expense, partially offset by a $1.2 million increase in ongoing public company costs, and an increase in wages and related expenses.

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 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.

Underwriting fees related to our offering of common stock were $11.4 million for the two fiscal quarters ended July 2, 2022, related to the offering that was completed in January 2022.

Amortization was $14.3 million for the two fiscal quarters ended July 2, 2022, compared to $11.1 million for the two fiscal quarters ended July 3, 2021.

The $3.2 million, or 29.6%, 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.

Interest expense was $4.9 million for the two fiscal quarters ended July 2, 2022, compared to $16.6 million for the two fiscal quarters ended July 3, 2021.

The $11.7 million, or 70.3%, decrease in interest expense was primarily due to lower amortization of deferred financing costs and debt discount and a lower effective interest rate, compared to the two fiscal quarters ended July 3, 2021.

In addition, interest expense for the two fiscal quarters ended July 2, 2022 was partially offset by an unrealized gain of $3.9 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.

Loss on extinguishment of debt was $3.5 million for the two fiscal quarters ended July 2, 2022, compared to none for the two fiscal quarters ended July 3, 2021 as our debt refinancing was completed in February 2022.

Other Expense (Income), Net

Other expense (income), net was $0.6 million for the two fiscal quarters ended July 2, 2022, compared to ($1.3) million for the two fiscal quarters ended July 3, 2021.

The $1.9 million increase in other expense 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.

Earnings from equity method investment of Premier Pools & Spa was $1.3 million for the two fiscal quarters ended July 2, 2022, compared to $1.0 million for the two fiscal quarters ended July 3, 2021, primarily due to the financial performance of Premier Pools & Spa, partially offset by our reduced ownership interest during the two fiscal quarters ended July 2, 2022 as compared to the two fiscal quarters ended July 3, 2021.

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.

Income tax expense was $16.3 million for the two fiscal quarters ended July 2, 2022, compared to $8.1 million for the two fiscal quarters ended July 3, 2021.

Our effective tax rate was 91.8% for the two fiscal quarters ended July 2, 2022, compared to (21.9)% for the two fiscal quarters ended July 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.

federal statutory income tax rate and our effective income tax rate for the two fiscal quarters ended July 2, 2022 was primarily attributable to the discrete impact of stock-based 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.

federal statutory income tax rate and our effective income tax rate for the two fiscal quarters ended July 3, 2021 was primarily attributable to the discrete impact of stock-based compensation expense for which there is no associated tax benefit.

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.

Net income was $1.5 million for the two fiscal quarters ended July 2, 2022, compared to $45.1 million of net loss for the two fiscal quarters ended July 3, 2021.

The $46.6 million, or 103.2%, increase in net income was primarily due to the factors described above.

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.

Net income margin was 0.4% for the two fiscal quarters ended July 2, 2022, compared to net loss margin of 13.7% for the two fiscal quarters ended July 3, 2021.

The 14.1% increase in net income margin was due to a $46.6 million increase in net income and a $68.8 million increase in net sales, compared to the two fiscal quarters ended July 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 was $96.6 million for the two fiscal quarters ended July 2, 2022, compared to $76.4 million for the two fiscal quarters ended July 3, 2021.

The $20.2 million, or 26.5%, increase in Adjusted EBITDA was primarily due to the increase in net sales, as well as the other factors described above.

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.

Adjusted EBITDA margin was 24.2% for the two fiscal quarters ended July 2, 2022, compared to 23.2% for the two fiscal quarters ended July 3, 2021.

The 1.0% increase in Adjusted EBITDA margin was primarily due to a $20.2 million increase in Adjusted EBITDA and a $68.8 million increase in net sales, compared to the two fiscal quarters ended July 3, 2021, as well as the other factors described above.

Non-GAAP Financial Measures

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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.

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 compare our performance against that of other companies using similar measures, and as a performance measure in certain employee incentive programs.

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 are non-cash items or which 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, (xiii) Odessa fire and (xiv) 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.

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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.

There can be no assurance that we will not modify the presentation of Adjusted EBITDA and Adjusted EBITDA margin in the future, 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.

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Fiscal Quarter Ended

April 2, 2022

April 3, 2021

Net (loss) income

Two Fiscal Quarters Ended

(dollars in thousands)

Net income (loss)

Depreciation and amortization

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Underwriting fees related to offering of common stock (h)

Odessa fire (i)

Adjusted EBITDA

Net (loss) income margin

Net income (loss) margin

Adjusted EBITDA margin

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(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.

International, LLC and Radiant, which are amortized through cost of sales in the condensed consolidated statements of operations, and (iii) other items.

(f) Represents the loss on extinguishment of debt in connection with our Refinancing (as defined below).

(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 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.

(i) Represents costs incurred related to a production facility fire in Odessa, Texas.

(j) 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

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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 cash needs are to fund working capital, capital expenditures, debt service requirements, any acquisitions we may undertake and any share repurchases we may make.

As of July 2, 2022, we had $25.2 million of cash, $313.7 million of outstanding borrowings and an additional $75.0 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.

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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.

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(“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.

Dollar senior secured 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 and replace $294.0 million under, and terminate, the Credit Agreement (as defined below) and for general corporate purposes.

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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.

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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.

As of April 2, 2022 we had $10.0 million of outstanding borrowings under the New Revolving Credit Facility.

As of July 2, 2022 we had no 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 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, 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.

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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.

As of July 2, 2022 we had $313.7 million of outstanding borrowings under the New Term Loan.

As of July 2, 2022, we were in compliance with all covenants under the New Revolving Credit Facility and the New Term Loan.

Revolving Credit Facility

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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

Two Fiscal Quarters Ended

(in thousands)

Net cash used in operating activities

Net cash (used in) provided by operating activities

Net cash used in investing activities

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Effect of exchange rate changes on cash

Net decrease in cash

Net (decrease) increase in cash

Operating Activities

During the fiscal quarter ended April 2, 2022, operating activities used $57.5 million of cash.

During the two fiscal quarters ended July 2, 2022, operating activities used $15.1 million of cash.

Net income, after adjustments for non-cash items, provided cash of $71.1 million.

Cash used in operating activities was further driven by changes in our operating assets and liabilities, which used $86.2 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.

Net cash used in changes in our operating assets and liabilities for the two fiscal quarters ended July 2, 2022 consisted primarily of a $45.7 million increase in trade receivables, a $53.2 million increase in inventories, a $1.3 million increase in income tax receivable, a $0.4 million increase in other assets, a $2.4 million decrease in accrued expenses and other current liabilities, partially offset by a $0.8 million decrease in prepaid expenses and other current assets, a $15.9 million increase in accounts payable, and a $0.2 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.

During the two fiscal quarters ended July 3, 2021, operating activities provided $14.1 million of cash.

Net income, after adjustments for non-cash items, provided cash of $54.3 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.

Cash provided by operating activities was further driven by changes in our operating assets and liabilities, which used $40.2 million.

Net cash used in changes in our operating assets and liabilities for the two fiscal quarters ended July 3, 2021 consisted primarily of $44.5 million increase in trade receivables, a $9.5 million increase in inventories, a $3.7 increase in prepaid expenses and other current assets, and a $0.1 increase in income tax receivable, partially offset by an $11.0 million increase in accounts payable, a $5.6 increase in accrued expenses and other current liabilities, a $0.8 million decrease in other assets and a $0.1 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.

The changes in accrued expenses and other current liabilities and accounts payable were primarily due to timing of payments.

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.

During the two fiscal quarters ended July 2, 2022, investing activities used $17.1 million of cash, primarily consisting of purchases of property and equipment for $16.8 million and the settlement of the net working capital adjustment related to the acquisition of Radiant for $0.4 million.

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.

During the two fiscal quarters ended July 3, 2021, investing activities used $12.8 million of cash, primarily consisting of purchases of property and equipment for $13.0 million.

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.

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.

During the two fiscal quarters ended July 2, 2022, financing activities provided $13.4 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 $25.0 million, partially offset by repayments on long-term debt

borrowings of $284.8 million, the repurchase and retirement of common stock of $272.7 million, repayments on revolving credit facility borrowings of $25.0 million, and deferred financing fees paid of $6.9 million.

During the two fiscal quarters ended July 3, 2021, financing activities provided $17.9 million of cash, primarily consisting of proceeds from our initial public offering, completed on April 27, 2021 (the “IPO”), net of underwriting discounts, commissions and offering costs of $399.3 million, proceeds from long-term debt borrowings of $172.8 million and borrowings on the revolving credit facilities of $16.0 million, partially offset by the repurchase and retirement of common stock of $281.6 million, payments on long-term debt borrowings of $161.3 million, dividends to Class A unitholders of $110.0 million, and payments on revolving credit facility borrowings of $16.0 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.

There have been no material changes, outside of the ordinary course of business, to our contractual obligations during the two fiscal quarters ended July 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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis