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Item 2. Management’s Discussion and Analysis

2022-11-10 compared with 2022-08-11 · 135 added, 113 removed, 256 unchanged (49% of the section changed)

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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.

These forward-looking statements are generally identified by the use of forward-looking terminology, including the terms “anticipate,” “believe,” “confident,” “continue,” “could,” “depend,” “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 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.

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inability to compete successfully against current and future competitors;

inability to achieve projected savings from our cost reduction initiatives;

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.

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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

● 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

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.

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.

Highlights for the fiscal quarter ended October 1, 2022

● Increase in net sales of 16.9%, or $27.4 million, to $189.4 million for the fiscal quarter ended October 1, 2022, compared to $162.0 million for the fiscal quarter ended October 2, 2021.

● Increase in net income of $23.2 million, to $11.9 million for the fiscal quarter ended October 1, 2022, compared to a net loss of $11.3 million for the fiscal quarter ended October 2, 2021, representing an 6.3% net income margin for the fiscal quarter ended October 1, 2022.

● Increase in Adjusted EBITDA (as defined below) of $6.2 million, to $42.3 million for the fiscal quarter ended October 1, 2022, compared to $36.1 million for the fiscal quarter ended October 2, 2021.

Highlights for the three fiscal quarters ended October 1, 2022

● Increase in net sales of 19.6%, or $96.2 million, to $587.8 million for the three fiscal quarters ended October 1, 2022, compared to $491.6 million for the three fiscal quarters ended October 2, 2021.

● Increase in net income of $69.7 million, to $13.3 million for the three fiscal quarters ended October 1, 2022, compared to a net loss of $56.4 million for the three fiscal quarters ended October 2, 2021, representing an 2.3% net income margin for the three fiscal quarters ended October 1, 2022.

● Increase in Adjusted EBITDA of $26.4 million, to $138.9 million for the three fiscal quarters ended October 1, 2022, compared to $112.5 million for the three fiscal quarters ended October 2, 2021.

Business Update

Market conditions continue to evolve.

Our wholesale distribution partners continue to destock packaged pool inventory levels as they service dealer demand through existing supply.

This is resulting in continued volume declines in our packaged pool products in the fourth quarter.

Additionally, while interest in pool ownership remains strong, some homeowners are taking more time on their purchase decisions and establishing installation dates in light of the current macroeconomic environment.

We have responded to these dynamics with immediate actions to reduce our costs.

On November 8, 2022, we approved a cost reduction plan to optimize our production and shift schedules, implement a workforce reduction, and streamline our cover and liner manufacturing footprint with the planned closure of our Bossier City, Louisiana facility in the first quarter of 2023.

We expect to incur charges for employee severance and related costs, as well as fixed asset and facility related expenses, of approximately $2.0 million.

These costs will be recognized in the fourth quarter of 2022 and the first quarter of 2023.

We expect to generate annual operating expense savings of approximately $12.0 million in fiscal 2023 as a result of our cost reduction plan.

Inflation Reduction Act

The Inflation Reduction Act ("IRA") was passed into law on August 16, 2022.

Key provisions from the IRA include the implementation of a 15% corporate alternative minimum tax, an excise tax on stock buybacks, and significant tax incentives for energy and climate initiatives.

Enactment of the IRA has not impacted our financial condition, results of operations or cash flows for the period ended October 1, 2022 and we do not expect a material impact on our future results.

Key Performance Indicators

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Results of Operations

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 October 1, 2022 Compared to Fiscal Quarter Ended October 2, 2021

The following table summarizes our results of operations for the fiscal quarter ended October 1, 2022 and October 2, 2021:

Fiscal Quarter Ended

October 1, 2022

October 2, 2021

(dollars in thousands)

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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.

Net sales were $189.4 million for the fiscal quarter ended October 1, 2022, compared to $162.0 million for the fiscal quarter ended October 2, 2021.

The $27.4 million, or 16.9%, increase in net sales was due to a $27.6 million increase from pricing, partially offset by a $0.2 million decrease from volume.

The $27.6 million price increase reflects the impact of pricing actions to address inflation.

The $0.2 million volume decrease was largely in packaged pools, which were impacted by continued destocking in the

wholesale distribution channel.

The increase in total net sales of $27.4 million across our product lines consisted of $18.3 million for in-ground swimming pools, $1.3 million for liners and $7.8 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.

Cost of sales was $130.5 million for the fiscal quarter ended October 1, 2022, compared to $111.0 million for the fiscal quarter ended October 2, 2021.

Gross margin decreased by 0.4%, to 31.1% of net sales for the fiscal quarter ended October 1, 2022 compared to 31.5% of net sales for the fiscal quarter ended October 2, 2021.

The $19.5 million, or 17.6%, increase in cost of sales was primarily the result of cost inflation, partially offset by a $1.2 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.

The 0.4% decrease in gross margin was primarily driven by pricing actions that offset inflation, although not at a magnitude to hold gross margins year-over-year, and negative fixed cost leverage, partially offset by benefits from the build of inventory to return to normal lead times.

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.

Selling, general and administrative expense was $26.7 million for the fiscal quarter ended October 1, 2022, compared to $48.1 million for the fiscal quarter ended October 2, 2021, and decreased as a percentage of net sales by 15.6%.

The $21.4 million, or 44.4%, decrease in selling, general and administrative expense was primarily due to a $19.4 million decrease in non-cash stock-based compensation expense and lower employee incentive accruals.

Amortization was $7.2 million for the fiscal quarter ended October 1, 2022, compared to $5.5 million for the fiscal quarter ended October 2, 2021.

The $1.7 million, or 30.4%, 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.

Interest expense was $4.3 million for the fiscal quarter ended October 1, 2022, compared to $4.3 million for the fiscal quarter ended October 2, 2021.

Interest expense remained flat primarily due to an unrealized gain related to the change in fair value of our interest rate swap, offset by an increase in the outstanding balance of long-term debt and higher amortization of deferred financing costs and debt discount for the fiscal quarter ended October 1, 2022.

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.

Other expense (income), net was $1.1 million for the fiscal quarter ended October 1, 2022, compared to ($2.5) million for the fiscal quarter ended October 2, 2021.

The $3.6 million increase in other expense was primarily due to a non-recurring $3.9 million gain related to the partial sale of our equity method investment for the fiscal quarter ended October 2, 2021 and a favorable 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.

Earnings from our equity method investment in Premier Pools & Spa were $1.3 million for the fiscal quarter ended October 1, 2022, compared to $0.8 million for the fiscal quarter ended October 2, 2021, primarily due to the financial performance of Premier Pools & Spa, partially offset by our reduced ownership interest during the fiscal quarter ended October 1, 2022 as compared to the fiscal quarter ended October 2, 2021.

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.

Income tax expense was $9.1 million for the fiscal quarter ended October 1, 2022, compared to $7.8 million for the fiscal quarter ended October 2, 2021.

Our effective tax rate was 43.4% for the fiscal quarter ended October 1, 2022, compared to (223.8)% for the fiscal quarter ended October 2, 2021.

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.

federal statutory income tax rate and our effective income tax rate for both the fiscal quarters ended October 1, 2022 and October 2, 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.

Net income was $11.9 million for the fiscal quarter ended October 1, 2022, compared to $11.3 million of net loss for the fiscal quarter ended October 2, 2021.

The $23.2 million, or 205.1%, 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.

Net income margin was 6.3% for the fiscal quarter ended October 1, 2022, compared to net loss margin of 7.0% for the fiscal quarter ended October 2, 2021.

The 13.3% increase in net income margin was due to a $23.2 million increase in net income and a $27.4 million increase in net sales, compared to the fiscal quarter ended October 2, 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.

Adjusted EBITDA was $42.3 million for the fiscal quarter ended October 1, 2022, compared to $36.1 million for the fiscal quarter ended October 2, 2021.

The $6.2 million, or 17.0%, 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

Adjusted EBITDA margin was 22.3% for the fiscal quarter ended October 1, 2022, compared to 22.3% for the fiscal quarter ended October 2, 2021.

Adjusted EBITDA margin remained flat primarily due to the factors described above.

Three Fiscal Quarters Ended October 1, 2022 Compared to Three Fiscal Quarters Ended October 2, 2021

The following table summarizes our results of operations for the three fiscal quarters ended October 1, 2022 and October 2, 2021:

Three Fiscal Quarters Ended

October 1, 2022

October 2, 2021

(dollars in thousands)

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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.

The increase in total net sales of $68.8 million across our product lines was $22.3 million for in-ground swimming pools, $25.8 million for liners and $20.7 million for covers.

Net sales were $587.8 million for the three fiscal quarters ended October 1, 2022, compared to $491.6 million for three fiscal quarters ended October 2, 2021.

The $96.2 million, or 19.6%, increase in net sales was due to a $97.4 million increase from pricing, partially offset by a $1.2 million decrease from volume.

The $97.4 million price increase reflects the impact of pricing actions to address inflation.

The increase in total net sales of $96.2 million across our product lines consisted of $40.6 million for in-ground swimming pools, $27.1 million for liners and $28.5 million for covers.

Cost of Sales and Gross Margin

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.

Cost of sales was $390.7 million for the three fiscal quarters ended October 1, 2022, compared to $329.8 million for the three fiscal quarters ended October 2, 2021.

Gross margin increased by 0.6%, to 33.5% of net sales for the three fiscal quarters ended October 1, 2022 compared to 32.9% of net sales for the three fiscal quarters ended October 2, 2021.

The $60.9 million, or 18.5%, 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 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.

The 0.6% increase in gross margin was primarily driven by lower non-cash stock-based compensation expense and benefits from the build of inventory, partially offset by pricing actions that offset inflation, although not at a magnitude to hold gross margins year-over-year.

Selling, General and Administrative Expense

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.

Selling, general and administrative expense was $113.8 million for the three fiscal quarters ended October 1, 2022, compared to $170.5 million for the three fiscal quarters ended October 2, 2021, and decreased as a percentage of net sales by 15.3%.

The $56.7 million, or 33.3%, decrease in selling, general and administrative expense was primarily due to a $60.4 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 insurance and travel 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 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.

Underwriting fees related to our offering of common stock were $11.4 million for the three fiscal quarters ended October 1, 2022, related to the offering that was completed in January 2022.

Amortization was $21.5 million for the three fiscal quarters ended October 1, 2022, compared to $16.6 million for the three fiscal quarters ended October 2, 2021.

The $4.9 million, or 29.9%, 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 $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.

Interest expense was $9.2 million for the three fiscal quarters ended October 1, 2022, compared to $20.8 million for the three fiscal quarters ended October 2, 2021.

The $11.6 million, or 55.9%, decrease in interest expense was primarily due to lower amortization of deferred financing costs and debt discount and a lower effective interest rate due to the refinancing, compared to the three fiscal quarters ended October 2, 2021.

In addition, interest expense for the three fiscal quarters ended October 1, 2022 was partially offset by an unrealized gain of $4.2 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 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.

Loss on extinguishment of debt was $3.5 million for the three fiscal quarters ended October 1, 2022, compared to none for the three fiscal quarters ended October 2, 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.

Other expense (income), net was $1.6 million for the three fiscal quarters ended October 1, 2022, compared to ($3.9) million for the three fiscal quarters ended October 2, 2021.

The $5.5 million increase in other expense was primarily due to a non-recurring $3.9

million gain related to the partial sale of our equity method investment for the three fiscal quarters ended October 2, 2021 and 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 $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.

Earnings from our equity method investment in Premier Pools & Spa were $2.6 million for the three fiscal quarters ended October 1, 2022, compared to $1.8 million for the three fiscal quarters ended October 2, 2021, primarily due to the financial performance of Premier Pools & Spa, partially offset by our reduced ownership interest during the three fiscal quarters ended October 1, 2022 as compared to the three fiscal quarters ended October 2, 2021.

Income Tax Expense

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 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.

Income tax expense was $25.4 million for the three fiscal quarters ended October 1, 2022, compared to $15.9 million for the three fiscal quarters ended October 2, 2021.

Our effective tax rate was 65.6% for the three fiscal quarters ended October 1, 2022, compared to (39.3)% for the three fiscal quarters ended October 2, 2021.

The difference between the U.S.

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 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.

federal statutory income tax rate and our effective income tax rate for both the three fiscal quarters ended October 1, 2022 and October 2, 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 $13.3 million for the three fiscal quarters ended October 1, 2022, compared to $56.4 million of net loss for the three fiscal quarters ended October 2, 2021.

The $69.7 million, or 123.7%, increase in net income was primarily due to the factors described above.

Net (Loss) Income Margin

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.

Net Income (Loss) Margin

Net income margin was 2.3% for the three fiscal quarters ended October 1, 2022, compared to net loss margin of 11.5% for the three fiscal quarters ended October 2, 2021.

The 13.8% increase in net income margin was due to a $69.7 million increase in net income and a $96.2 million increase in net sales, compared to the three fiscal quarters ended October 2, 2021 due to the factors described above.

Adjusted EBITDA

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.

Adjusted EBITDA was $138.9 million for the three fiscal quarters ended October 1, 2022, compared to $112.5 million for the three fiscal quarters ended October 2, 2021.

The $26.4 million, or 23.5%, 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 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.

Adjusted EBITDA margin was 23.6% for the three fiscal quarters ended October 1, 2022, compared to 22.9% for the three fiscal quarters ended October 2, 2021.

The 0.7% increase in Adjusted EBITDA margin was primarily due to a $26.4 million increase in Adjusted EBITDA and a $96.2 million increase in net sales, compared to the three fiscal quarters ended October 2, 2021, as well as the other factors described above.

Non-GAAP Financial Measures

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Fiscal Quarter Ended

Two Fiscal Quarters Ended

Three Fiscal Quarters Ended

October 1, 2022

October 2, 2021

October 1, 2022

October 2, 2021

(dollars in thousands)

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Stock-based compensation (b)

Unrealized (gains) losses on foreign currency transactions(c)

Unrealized losses on foreign currency transactions (c)

Strategic initiative costs (d)

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Loss on extinguishment of debt (f)

Other, net (g)

Underwriting fees related to offering of common stock (h)

Odessa fire (i)

IPO Costs (j)

Adjusted EBITDA

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(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.

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(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) 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.

(i) Represents costs incurred and insurance recoveries 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 IPO (as defined below) that are not capitalizable, which are included within selling, general and administrative expense.

Liquidity and Capital Resources

Our primary sources of liquidity are net cash provided by operating activities and availability under our New Revolving Credit Facility.

Our primary sources of liquidity are net cash provided by operating activities and availability under our New Revolving Credit Facility (as defined below).

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, 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.

As of October 1, 2022, we had $30.6 million of cash, $313.3 million of outstanding borrowings on the New Term Loan (as defined below) 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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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 (the “Refinancing”).

(“Latham Pool Products”), our wholly owned subsidiary, entered into an agreement (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 (the “New Revolving Credit Facility”) 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 and replace $294.0 million under, and terminate, the Credit Agreement (as defined below) and for general corporate purposes.

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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 July 2, 2022 we had no outstanding borrowings under the New Revolving Credit Facility.

As of October 1, 2022 we had no outstanding borrowings under the New Revolving Credit Facility.

New Term Loan Facility

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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 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

As of October 1, 2022 we had $313.3 million of outstanding borrowings under the New Term Loan.

As of October 1, 2022, we were in compliance with all covenants under the New Revolving Credit Facility and the New Term Loan.

Prior 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).

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The Revolving Credit Facility was terminated in connection with the Refinancing.

Term Loan Facility

Prior Term Loan Facility

Pursuant to the Credit Agreement, Latham Pool Products also borrowed $215.0 million in term loans (the “Term Loan”).

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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.

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.

During the three fiscal quarters ended October 1, 2022, we repurchased and concurrently retired 2,026,231 shares of our common stock for an aggregate amount of $15.0 million, pursuant to the Repurchase Program.

As of October 1, 2022, approximately $85.0 million remained available for share repurchases pursuant to our Repurchase Program.

The following table summarizes our sources and uses of cash for each of the periods presented:

Two Fiscal Quarters Ended

Three Fiscal Quarters Ended

October 1, 2022

October 2, 2021

(in thousands)

Net cash (used in) provided by operating activities

Net cash provided by operating activities

Net cash used in investing activities

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Operating Activities

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

During the three fiscal quarters ended October 1, 2022, operating activities provided $5.2 million of cash.

Net income, after adjustments for non-cash items, provided cash of $105.4 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 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.

Cash provided by operating activities was further driven by changes in our operating assets and liabilities, which used $100.1 million.

Net cash used in changes in our operating assets and liabilities for the three fiscal quarters ended October 1, 2022 consisted primarily of a $44.9 million increase in trade receivables, a $59.1 million increase in inventories, a $2.1 million increase in income tax receivable, a $0.4 million increase in other assets, a $0.1 million decrease in accrued expenses and other current liabilities, partially offset by a $2.5 million decrease in prepaid expenses and other current assets, a $3.7 million increase in accounts payable, and a $0.3 million increase in other long-term liabilities.

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

During the three fiscal quarters ended October 2, 2021, operating activities provided $29.4 million of cash.

Net income, after adjustments for non-cash items, provided cash of $75.3 million.

Cash provided by operating activities was further driven by changes in our operating assets and liabilities, which used $45.9 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 changes in accrued expenses and other current liabilities and accounts payable were primarily due to timing of payments.

Net cash used in changes in our operating assets and liabilities for the three fiscal quarters ended October 2, 2021 consisted primarily of a $43.1 million increase in trade receivables, a $16.1 million increase in inventories, a $4.8 million increase in prepaid expenses and other current assets, a $1.8 million increase in income tax receivable, and a $0.5 million increase in other assets, partially offset by a $10.6 million increase in accounts payable, a $9.7 million increase in accrued expenses and other current liabilities, 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 cost inflation.

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

Investing Activities

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.

During the three fiscal quarters ended October 1, 2022, investing activities used $29.4 million of cash, primarily consisting of purchases of property and equipment for $29.0 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 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.

During the three fiscal quarters ended October 2, 2021, investing activities used $12.0 million of cash, primarily consisting of purchases of property and equipment for $19.2 million, partially offset by proceeds from the sale of equity method investment of $6.8 million and return of equity method investment of $0.4 million.

The purchase of property and equipment was primarily to expand capacity for inventory production in order to meet increasing customer demand.

Financing Activities

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

During the three fiscal quarters ended October 1, 2022, financing activities provided $12.6 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 $285.6 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.

During the three fiscal quarters ended October 2, 2021, financing activities provided $14.3 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 $164.8 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 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.

There have been no material changes, outside of the ordinary course of business, to our contractual obligations during the three fiscal quarters ended October 1, 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