Latham Group, Inc. 10-Q

Item 1. Financial Statements Index to Condensed Consolidated Financial Statements (Unaudited) ​ ​ ​ Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Operations ​ 5 Condensed Consolidated Statements of Comprehensive Income (Loss) ​ 6 Condensed Consolidated Statements of Stockholders’ Equity ​ 7 Condensed Consolidated Statements of Cash Flows ​ 9 Notes to Condensed Consolidated Financial Statements ​ 10 ​ ​ ​ 3 Table of Contents Latham Group, Inc. Condensed Consolidated Balance Sheets (in thousands, except share and per share data) (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ October 1, ​ December 31, ​ ​ 2022 2021 ​ Assets ​ ​ ​ ​ ​ ​ ​ Current assets: ​ ​ ​ Cash ​ $ 30,620 ​ $ 43,952 ​ Trade receivables, net ​ 102,985 ​ 60,753 ​ Inventories, net ​ 166,430 ​ 109,556 ​ Income tax receivable ​ 6,090 ​ 4,039 ​ Prepaid expenses and other current assets ​ 8,113 ​ 10,766 ​ Total current assets ​ 314,238 ​ 229,066 ​ Property and equipment, net ​ 84,148 ​ 63,506 ​ Equity method investment ​ 25,953 ​ 23,362 ​ Deferred tax assets ​ 7,814 ​ 10,603 ​ Operating lease right-of-use assets ​ ​ 39,201 ​ ​ — ​ Goodwill ​ 128,057 ​ 128,871 ​ Intangible assets, net ​ 315,064 ​ 338,310 ​ Other assets ​ ​ 6,028 ​ ​ 765 ​ Total assets ​ $ 920,503 ​ $ 794,483 ​ Liabilities and Stockholders’ Equity ​ ​ ​ Current liabilities: ​ ​ ​ Accounts payable ​ $ 41,067 ​ $ 37,998 ​ Accounts payable – related party ​ 1,041 ​ 850 ​ Current maturities of long-term debt ​ 3,250 ​ 17,220 ​ Current operating lease liabilities ​ ​ 6,485 ​ ​ — ​ Accrued expenses and other current liabilities ​ 64,078 ​ 59,097 ​ Total current liabilities ​ 115,921 ​ 115,165 ​ Long-term debt, net of discount, debt issuance costs and current portion ​ 310,051 ​ 263,188 ​ Deferred income tax liabilities, net ​ 56,343 ​ 56,343 ​ Liability for uncertain tax positions ​ 5,863 ​ 5,689 ​ Non-current operating lease liabilities ​ ​ 33,547 ​ ​ — ​ Other long-term liabilities ​ 743 ​ 453 ​ Total liabilities ​ 522,468 ​ 440,838 ​ Commitments and contingencies ​ ​ ​ Stockholders’ equity: ​ ​ ​ Preferred stock, $ 0.0001 par value; 100,000,000 shares authorized as of both October 1, 2022 and December 31, 2021; no shares issued and outstanding as of both October 1, 2022 and December 31, 2021 ​ ​ — ​ ​ — ​ Common stock, $ 0.0001 par value; 900,000,000 shares authorized as of October 1, 2022 and December 31, 2021; 117,121,134 and 119,445,611 shares issued and outstanding , as of October 1, 2022 and December 31, 2021, respectively ​ 12 ​ 12 ​ Additional paid-in capital ​ 438,698 ​ 401,846 ​ Accumulated deficit ​ ( 35,535 ) ​ ( 48,583 ) ​ Accumulated other comprehensive (loss) income ​ ( 5,140 ) ​ 370 ​ Total stockholders’ equity ​ 398,035 ​ 353,645 ​ Total liabilities and stockholders’ equity ​ $ 920,503 ​ $ 794,483 ​ ​ ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 4 Table of Contents Latham Group, Inc. Condensed Consolidated Statements of Operations (in thousands, except share and per share data) (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended ​ Three Fiscal Quarters Ended ​ ​ October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 ​ Net sales ​ $ 189,398 ​ $ 161,957 ​ $ 587,812 ​ $ 491,592 ​ Cost of sales ​ 130,521 ​ 110,965 ​ 390,674 ​ 329,805 ​ Gross profit ​ 58,877 ​ 50,992 ​ 197,138 ​ 161,787 ​ Selling, general and administrative expense ​ 26,749 ​ 48,072 ​ 113,778 ​ 170,532 ​ Underwriting fees related to offering of common stock ​ ​ — ​ ​ — ​ ​ 11,437 ​ ​ — ​ Amortization ​ 7,156 ​ 5,486 ​ 21,504 ​ 16,560 ​ Income (loss) from operations ​ 24,972 ​ ( 2,566 ) ​ 50,419 ​ ( 25,305 ) ​ Other expense (income): ​ ​ ​ ​ ​ Interest expense ​ 4,264 ​ 4,271 ​ 9,193 ​ 20,843 ​ Loss on extinguishment of debt ​ ​ — ​ ​ — ​ ​ 3,465 ​ ​ — ​ Other expense (income), net ​ 1,052 ​ ( 2,538 ) ​ 1,614 ​ ( 3,887 ) ​ Total other expense, net ​ 5,316 ​ 1,733 ​ 14,272 ​ 16,956 ​ Earnings from equity method investment ​ ​ 1,329 ​ ​ 810 ​ ​ 2,591 ​ ​ 1,808 ​ Income (loss) before income taxes ​ 20,985 ​ ( 3,489 ) ​ 38,738 ​ ( 40,453 ) ​ Income tax expense ​ 9,109 ​ 7,807 ​ 25,399 ​ 15,908 ​ Net income (loss) ​ $ 11,876 ​ $ ( 11,296 ) ​ $ 13,339 ​ $ ( 56,361 ) ​ Net income (loss) per share attributable to common stockholders: ​ ​ ​ ​ ​ Basic ​ $ 0.10 ​ $ ( 0.10 ) ​ $ 0.12 ​ $ ( 0.51 ) ​ Diluted ​ $ 0.10 ​ $ ( 0.10 ) ​ $ 0.12 ​ $ ( 0.51 ) ​ Weighted-average common shares outstanding – basic and diluted ​ ​ ​ ​ ​ Basic ​ 113,171,655 ​ 112,153,832 ​ 113,521,425 ​ 110,121,240 ​ Diluted ​ 113,202,846 ​ 112,153,832 ​ 114,867,164 ​ 110,121,240 ​ ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 5 Table of Contents Latham Group, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended ​ Three Fiscal Quarters Ended ​ ​ October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 ​ Net income (loss) ​ $ 11,876 ​ $ ( 11,296 ) ​ $ 13,339 ​ $ ( 56,361 ) ​ Other comprehensive loss, net of tax: ​ ​ ​ ​ ​ Foreign currency translation adjustments ​ ( 2,813 ) ​ ( 887 ) ​ ( 5,510 ) ​ ( 1,924 ) ​ Total other comprehensive loss, net of tax ​ ( 2,813 ) ​ ( 887 ) ​ ( 5,510 ) ​ ( 1,924 ) ​ Comprehensive income (loss) ​ $ 9,063 ​ $ ( 12,183 ) ​ $ 7,829 ​ $ ( 58,285 ) ​ ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 6 Table of Contents Latham Group, Inc. Condensed Consolidated Statements of Stockholders’ Equity (in thousands, except share amounts) (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Retained Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ Earnings ​ Other ​ Total ​ ​ ​ ​ ​ ​ ​ Paid-in ​ (Accumulated ​ Comprehensive ​ Stockholders' ​ ​ Shares ​ Amount ​ Capital ​ Deficit) ​ Income (Loss) ​ Equity Balances at December 31, 2020 118,854,249 ​ $ 12 ​ $ 265,478 ​ $ 13,765 ​ $ 2,354 ​ $ 281,609 Net income — ​ — ​ — ​ 8,533 ​ — ​ 8,533 Foreign currency translation adjustments — ​ — ​ — ​ — ​ ( 1,201 ) ​ ( 1,201 ) Dividend to Class A unitholders ($ 1.00 per share) ​ — ​ ​ — ​ ​ ( 110,033 ) ​ ​ — ​ ​ — ​ ​ ( 110,033 ) Repurchase and retirement of common stock ​ ( 21,666,653 ) ​ ​ ( 2 ) ​ ​ ( 64,936 ) ​ ​ — ​ ​ — ​ ​ ( 64,938 ) Stock-based compensation expense — ​ — ​ 1,464 ​ — ​ — ​ 1,464 Balances at April 3, 2021 97,187,596 ​ $ 10 ​ $ 91,973 ​ $ 22,298 ​ $ 1,153 ​ $ 115,434 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net loss — ​ — ​ — ​ ( 53,598 ) ​ — ​ ( 53,598 ) Foreign currency translation adjustments — ​ — ​ — ​ — ​ 164 ​ 164 Net proceeds from initial public offering ​ 23,000,000 ​ ​ 2 ​ ​ 399,262 ​ ​ — ​ ​ — ​ ​ 399,264 Repurchase and retirement of common stock ( 12,264,438 ) ​ ( 1 ) ​ ( 216,699 ) ​ — ​ — ​ ( 216,700 ) Issuance of restricted stock in connection with the Reorganization ​ 8,340,126 ​ ​ 1 ​ ​ ( 1 ) ​ ​ — ​ ​ — ​ ​ — Issuance of common stock upon conversion of Class B units ​ 4,145,987 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Stock-based compensation expense ​ — ​ ​ — ​ ​ 75,511 ​ ​ — ​ ​ — ​ ​ 75,511 Balances at July 3, 2021 120,409,271 ​ $ 12 ​ $ 350,046 ​ $ ( 31,300 ) ​ $ 1,317 ​ $ 320,075 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net loss — ​ — ​ — ​ ( 11,296 ) ​ — ​ ( 11,296 ) Foreign currency translation adjustments — ​ — ​ — ​ — ​ ( 887 ) ​ ( 887 ) Retirement of restricted stock ​ ( 559,682 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Stock-based compensation expense ​ — ​ ​ — ​ ​ 27,603 ​ ​ — ​ ​ — ​ ​ 27,603 Balances at October 2, 2021 119,849,589 ​ $ 12 ​ $ 377,649 ​ $ ( 42,596 ) ​ $ 430 ​ $ 335,495 ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 7 Table of Contents ​ Latham Group, Inc. Condensed Consolidated Statements of Stockholders’ Equity (in thousands, except share amounts) (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Retained Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ Earnings ​ Other ​ Total ​ ​ ​ ​ ​ ​ ​ Paid-in ​ (Accumulated ​ Comprehensive ​ Stockholders' ​ ​ Shares ​ Amount ​ Capital ​ Deficit) ​ Income (Loss) ​ Equity Balances at December 31, 2021 119,445,611 ​ $ 12 ​ $ 401,846 ​ $ ( 48,583 ) ​ $ 370 ​ $ 353,645 Cumulative effect of adoption of new accounting standard- leases ​ — ​ ​ — ​ ​ — ​ ​ ( 291 ) ​ ​ — ​ ​ ( 291 ) Net loss — ​ — ​ — ​ ( 2,840 ) ​ — ​ ( 2,840 ) Foreign currency translation adjustments — ​ — ​ — ​ — ​ 1,220 ​ 1,220 Sale of common stock ​ 13,800,000 ​ ​ 1 ​ ​ 269,099 ​ ​ — ​ ​ — ​ ​ 269,100 Repurchase and retirement of common stock ​ ( 13,800,244 ) ​ ​ ( 1 ) ​ ​ ( 257,662 ) ​ ​ — ​ ​ — ​ ​ ( 257,663 ) Retirement of restricted stock ​ ( 53,961 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Issuance of common stock upon release of restricted stock units ​ 78,341 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Stock-based compensation expense — ​ — ​ 16,925 ​ — ​ — ​ 16,925 Balances at April 2, 2022 119,469,747 ​ $ 12 ​ $ 430,208 ​ $ ( 51,714 ) ​ $ 1,590 ​ $ 380,096 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income — ​ — ​ — ​ 4,303 ​ — ​ 4,303 Foreign currency translation adjustments — ​ — ​ — ​ — ​ ( 3,917 ) ​ ( 3,917 ) Repurchases and retirements of common stock under repurchase program ( 2,026,231 ) ​ — ​ ( 15,000 ) ​ — ​ — ​ ( 15,000 ) Issuance of common stock upon release of restricted stock units ​ 104,042 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Stock-based compensation expense ​ — ​ ​ — ​ ​ 16,429 ​ ​ — ​ ​ — ​ ​ 16,429 Balances at July 2, 2022 117,547,558 ​ $ 12 ​ $ 431,637 ​ $ ( 47,411 ) ​ $ ( 2,327 ) ​ $ 381,911 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income — ​ — ​ — ​ 11,876 ​ — ​ 11,876 Foreign currency translation adjustments — ​ — ​ — ​ — ​ ( 2,813 ) ​ ( 2,813 ) Retirement of restricted stock ( 426,424 ) ​ — ​ — ​ — ​ — ​ — Stock-based compensation expense ​ — ​ ​ — ​ ​ 7,061 ​ ​ — ​ ​ — ​ ​ 7,061 Balances at October 1, 2022 117,121,134 ​ $ 12 ​ $ 438,698 ​ $ ( 35,535 ) ​ $ ( 5,140 ) ​ $ 398,035 ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 8 Table of Contents Latham Group, Inc. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Fiscal Quarters Ended ​ ​ ​ October 1, ​ October 2, ​ ​ 2022 2021 ​ Cash flows from operating activities: ​ ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ 13,339 ​ $ ( 56,361 ) ​ Adjustments to reconcile net income (loss) to net cash provided by operating activities: ​ ​ ​ Depreciation and amortization ​ 28,834 ​ 23,689 ​ Amortization of deferred financing costs and debt discount ​ 1,140 ​ 5,907 ​ Non-cash lease expense ​ 5,596 ​ — ​ Stock-based compensation expense ​ 40,415 ​ 104,578 ​ Underwriting fees related to offering of common stock ​ ​ 11,437 ​ ​ — ​ Loss on extinguishment of debt ​ ​ 3,465 ​ ​ — ​ Other non-cash, net ​ ​ 3,750 ​ ​ 1,349 ​ Gain on sale of equity method investment ​ ​ — ​ ​ ( 3,856 ) ​ Earnings from equity method investment ​ ​ ( 2,591 ) ​ ​ ( 1,808 ) ​ Distributions received from equity method investment ​ ​ — ​ ​ 1,808 ​ Changes in operating assets and liabilities: ​ ​ ​ Trade receivables ​ ( 44,875 ) ​ ( 43,134 ) ​ Inventories ​ ( 59,139 ) ​ ( 16,128 ) ​ Prepaid expenses and other current assets ​ 2,458 ​ ( 4,774 ) ​ Income tax receivable ​ ( 2,051 ) ​ ( 1,752 ) ​ Other assets ​ ​ ( 442 ) ​ ​ ( 465 ) ​ Accounts payable ​ 3,702 ​ 10,550 ​ Accrued expenses and other current liabilities ​ ( 92 ) ​ 9,740 ​ Other long-term liabilities ​ 290 ​ 83 ​ Net cash provided by operating activities ​ 5,236 ​ 29,426 ​ Cash flows from investing activities : ​ ​ ​ Purchases of property and equipment ​ ( 29,002 ) ​ ( 19,242 ) ​ Proceeds from the sale of property and equipment ​ 24 ​ 33 ​ Acquisitions of businesses, net of cash acquired ​ ( 384 ) ​ — ​ Return of equity method investment ​ ​ — ​ ​ 447 ​ Proceeds from the sale of equity method investment ​ ​ — ​ ​ 6,796 ​ Net cash used in investing activities ​ ( 29,362 ) ​ ( 11,966 ) ​ Cash flows from financing activities : ​ ​ ​ Proceeds from long-term debt borrowings ​ 320,125 ​ 172,813 ​ Payments on long-term debt borrowings ​ ( 285,634 ) ​ ( 164,833 ) ​ Proceeds from borrowings on revolving credit facilities ​ ​ 25,000 ​ ​ 16,000 ​ Payments on revolving credit facilities ​ ​ ( 25,000 ) ​ ​ ( 16,000 ) ​ Deferred financing fees paid ​ ​ ( 6,865 ) ​ ​ ( 1,250 ) ​ Dividend to Class A unitholders ​ ​ — ​ ​ ( 110,033 ) ​ Proceeds from sale of common stock ​ ​ 257,663 ​ ​ — ​ Proceeds from initial public offering, net of underwriting discounts, commissions and offering costs ​ ​ — ​ ​ 399,264 ​ Repurchases and retirements of common stock ​ ​ ( 272,663 ) ​ ​ ( 281,638 ) ​ Net cash provided by financing activities ​ 12,626 ​ 14,323 ​ Effect of exchange rate changes on cash ​ ( 1,832 ) ​ ( 224 ) ​ Net (decrease) increase in cash ​ ( 13,332 ) ​ 31,559 ​ Cash at beginning of period ​ 43,952 ​ 59,310 ​ Cash at end of period ​ $ 30,620 ​ $ 90,869 ​ Supplemental cash flow information : ​ ​ ​ Cash paid for interest ​ $ 8,760 ​ $ 14,208 ​ Income taxes paid, net ​ ​ 20,000 ​ ​ 15,213 ​ Supplemental disclosure of non-cash investing and financing activities : ​ ​ ​ ​ Purchases of property and equipment included in accounts payable and accrued expenses ​ $ 2,202 ​ $ 226 ​ Capitalized internal-use software included in accounts payable – related party ​ ​ 800 ​ ​ 1,050 ​ Right-of-use operating assets obtained in exchange for lease liabilities ​ ​ 45,876 ​ ​ — ​ ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 9 Table of Contents Notes to Condensed Consolidated Financial Statements  1. NATURE OF THE BUSINESS Latham Group, Inc. (the “Company”) wholly owns Latham Pool Products, Inc. (“Latham Pool Products”) (together, “Latham”) and is a designer, manufacturer and marketer of in-ground residential swimming pools in North America, Australia and New Zealand. Latham offers a portfolio of pools and related products, including in-ground swimming pools, pool liners and pool covers. On December 18, 2018, Latham Investment Holdings, LP (“Parent”), an investment fund managed by affiliates of Pamplona Capital Management (the “Sponsor”), Wynnchurch Capital, L.P. and management acquired all of the outstanding equity interests of Latham Topco., Inc., a newly incorporated entity in the State of Delaware. Latham Topco, Inc. changed its name to Latham Group, Inc. on March 3, 2021. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Unaudited Interim Financial Information The consolidated balance sheet at December 31, 2021 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying unaudited condensed consolidated financial statements as of October 1, 2022 and for the fiscal quarter and three fiscal quarters ended October 1, 2022 and October 2, 2021 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with Latham Group, Inc.’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2021 included in the Company’s 2021 Annual Report on Form 10-K, filed with the SEC on March 10, 2022 (the “Annual Report”). In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of these condensed consolidated financial statements, have been included. The Company’s results of operations for the fiscal quarter and three fiscal quarters ended October 1, 2022 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2022. Use of Estimates The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company bases its estimates on historical experience, known trends and other market-specific relevant factors that it believes to be reasonable under the circumstances. Estimates are evaluated on an ongoing basis and revised as there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Segment Reporting The Company identifies operating segments based on how the chief operating decision maker manages the business, allocates resources, makes operating decisions and evaluates operating performance. The Company conducts its business as one operating and reportable segment that designs, manufactures and markets in-ground swimming pools, liners and covers. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information presented on a consolidated basis for purposes of assessing financial performance and allocating resources. 10 Table of Contents Seasonality Although the Company generally has demand for its products throughout the year, its business is seasonal and weather is one of the principal external factors affecting the business. Historically, net sales and net income are highest during spring and summer, representing the peak months of swimming pool use, pool installation and remodeling and repair activities. Severe weather may also affect net sales in all periods. Accounting Policies Refer to the Company’s Annual Report for a discussion of the Company’s accounting policies, as updated below. Recently Issued Accounting Pronouncements The Company qualifies as “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and has elected to “opt in” to the extended transition related to complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application dates for public and nonpublic companies, the Company will adopt the new or revised standard at the time nonpublic companies adopt the new or revised standard and will do so until such time that the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualifies as an emerging growth company. The Company may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies. In February 2016, the FASB issued ASU 2016-02 , Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. In addition, a lessee is required to record (i) a right-of-use asset and a lease liability on its balance sheet for all leases with accounting lease terms of more than 12 months regardless of whether it is an operating or financing lease and (ii) lease expense in its consolidated statement of operations for operating leases and amortization and interest expense in its consolidated statement of operations for financing leases. Leases with a term of 12 months or less may be accounted for similar to how operating leases were accounted for under the prior guidance. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842) , which added an optional transition method that allows companies to adopt the standard as of the beginning of the year of adoption as opposed to the earliest comparative period presented. In November 2019, the FASB issued guidance delaying the effective date for all entities, except for public business entities. For nonpublic entities, this guidance is effective for annual periods beginning after December 15, 2020. In June 2020, the FASB issued additional guidance delaying the effective date for all entities, except for public business entities. The Company adopted ASU 2016-02 on January 1, 2022 using the modified retrospective approach and elected the package of practical expedients to use in transition, which permitted the Company to not reassess, under the new standard, its prior conclusions about lease identification and lease classification. The adoption resulted in the addition of $ 33.5 million of operating lease right-of-use assets, and $ 34.0 million of operating lease liabilities, a decrease of $ 0.2 million to deferred rent and a decrease of $ 0.3 million to retained earnings for the cumulative effect of initially applying the new standard. The adoption did not have a material impact on the Company’s Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Stockholders’ Equity or Condensed Consolidated Statements of Cash Flows. See Note 9, “Leases” for additional information related to the Company’s leases and accounting policy elections. In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses , which narrowed the scope and changed the effective date for nonpublic entities for ASU 2016-13. The FASB subsequently issued supplemental guidance within ASU 2019-05, Financial Instruments — Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”). ASU 2019-05 provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For public entities that are SEC filers, excluding entities eligible to be smaller reporting companies, ASU 2016-13 is effective for annual periods beginning 11 Table of Contents after December 15, 2019, including interim periods within those fiscal years. For all other entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. As an “emerging growth company”, the Company is not yet required to adopt the standard and is currently evaluating the impact that the adoption of ASU 2016-13 will have on its consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope , which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, this guidance applies to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. This guidance is effective for all entities upon issuance on March 12, 2020 and may be applied through December 31, 2022. The expedients and exceptions in this guidance are optional. The Company elected the optional expedient in connection with amending its interest rate swap to replace the reference rate from LIBOR to SOFR to consider the amendment as a continuation of the existing contract without having to perform an assessment that would otherwise be required under GAAP. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which amends ASC 805 by requiring acquiring entities to apply ASC 606 to recognize and measure contract assets and contract liabilities in a business combination. For public entities, ASU 2021-08 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022. For all other entities, ASU 2021-08 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. The amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments, with early adoption permitted. The Company is currently evaluating ASU 2021-08 and its potential impact on its consolidated financial statements. 3. ACQUISITION Trojan Leisure Products, LLC d/b/a Radiant Pools On November 24, 2021, Latham Pool Products acquired Trojan Leisure Products, LLC d/b/a Radiant Pools (“Radiant”) for a total purchase price of $ 90.7 million (the “Radiant Acquisition”). The results of Radiant’s operations have been included in the consolidated financial statements since that date. Radiant specializes in manufacturing proprietary vinyl liner aluminum swimming pools which can be built completely in-ground, semi-inground, or above ground. As a result, this acquisition expanded the Company’s product offerings. In connection with the Radiant Acquisition, consideration paid was $ 90.7 million in cash, or $ 90.5 million net of cash acquired of $ 0.2 million. The cash consideration was funded, in part, through long-term debt proceeds of $ 50.0 million. The Company incurred $ 2.9 million in transaction costs. Subsequent to the acquisition date, there was an additional amount due to the seller of $ 0.4 million related to the finalization of the net working capital adjustment, which was accounted for as a measurement period adjustment. The measurement period adjustment resulted in an increase in the total consideration transferred of $ 0.4 million and an increase to goodwill of $ 0.4 million. The net working capital adjustment was paid during the fiscal quarter ended July 2, 2022. The Company accounted for the Radiant Acquisition using the acquisition method of accounting in accordance with ASC 805. This requires that the assets acquired and liabilities assumed be measured at fair value. The Company estimated, using Level 3 inputs, the fair value of certain fixed assets using a combination of the cost approach and the market approach. Inventories were valued using the comparative sales method, less the cost of disposal. Specific to intangible assets, customer relationships and backlog were valued using the multi-period excess earnings method, whereas trade names, technology and pool designs were valued using the relief from royalty method. The Company recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. 12 Table of Contents The following summarizes the purchase price allocation for the Radiant Acquisition: ​ ​ ​ ​ ​ (in thousands) November 24, 2021 Total consideration ​ $ 91,109 Allocation of purchase price: ​ Cash ​ 217 Trade receivables ​ 2,805 Inventories ​ 5,528 Prepaid expenses and other current assets ​ 396 Property and equipment ​ 1,263 Intangible assets ​ 72,500 Total assets acquired ​ 82,709 Accounts payable ​ 1,744 Accrued expenses and other current liabilities ​ 1,038 Other long-term liabilities ​ 2,920 Total liabilities assumed ​ 5,702 Total fair value of net assets acquired, excluding goodwill: ​ 77,007 Goodwill ​ $ 14,102 ​ The excess of the purchase price over the fair value of the identifiable assets acquired and the liabilities assumed in the Radiant Acquisition was allocated to goodwill in the amount of $ 14.1 million. Goodwill resulting from the Radiant Acquisition was attributable to the expanded market share and product offerings. Goodwill resulting from the Radiant Acquisition is deductible for tax purposes. ​ The Company allocated a portion of the purchase price to specific intangible asset categories as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value ​ Amortization Definite-lived intangible assets: (in thousands) Period Dealer relationships ​ $ 37,000 13 years Trade names ​ 13,000 25 years Technology ​ ​ 13,000 ​ 15 years Pool designs ​ ​ 7,900 ​ 15 years Backlog ​ ​ 1,600 ​ 10 months ​ ​ $ 72,500 ​ ​ ​ ​ 4. FAIR VALUE MEASUREMENTS Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value. Level 1 — Quoted prices in active markets for identical assets or liabilities. Level 2 — Inputs, other than quoted prices in active markets, that are observable either directly or indirectly. Level 3 — Unobservable inputs that reflect the Company’s own assumptions incorporated into valuation techniques. These valuations require significant judgment. 13 Table of Contents In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When there is more than one input at different levels within the hierarchy, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assessment of the significance of a particular input to the fair value measurement in its entirety requires substantial judgment and consideration of factors specific to the asset or liability. Level 3 inputs are inherently difficult to estimate. Changes to these inputs can have significant impact on fair value measurements. Assets and liabilities measured at fair value using Level 3 inputs are based on one or more of the following valuation techniques: market approach, income approach or cost approach. There were no transfers between fair value measurement levels during the three fiscal quarters ended October 1, 2022 or October 2, 2021. Assets and liabilities measured at fair value on a nonrecurring basis The Company’s non-financial assets such as goodwill, intangible assets and property and equipment are measured at fair value upon acquisition or remeasured to fair value when an impairment charge is recognized. Such fair value measurements are based predominantly on Level 2 and Level 3 inputs. Fair value of financial instruments The Company considers the carrying amounts of cash, trade receivables, prepaid expenses and other current assets, accounts payable, and accrued expenses and other current liabilities, to approximate fair value due to the short-term maturities of these instruments. Term loans Term loans (see Note 7) are carried at amortized cost; however, the Company estimates the fair value of term loans for disclosure purposes. The fair value of term loans is determined using inputs based on observable market data of a non-public exchange, which are classified as Level 2 inputs. The following table sets forth the carrying amount and fair value of its term loans (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ October 1, 2022 ​ December 31, 2021 ​ ​ ​ Carrying ​ Estimated ​ Carrying ​ Estimated ​ ​ Value Fair Value Value Fair Value ​ New Term Loan ​ $ 313,301 ​ $ 278,838 ​ $ — ​ $ — ​ Amended Term Loan ​ $ — ​ $ — ​ $ 280,408 ​ $ 281,926 ​ ​ Interest rate swap The Company estimates the fair value of the interest rate swap (see Note 7) on a quarterly basis using Level 2 inputs, including the forward SOFR curve. The fair value is estimated by comparing (i) the present value of all future monthly fixed rate payments versus (ii) the variable payments based on the forward SOFR curve. As of October 1, 2022 and December 31, 2021, the fair value of the Company’s interest rate swap asset was $ 4.7 million and $ 0.5 million, respectively, which was recorded within other assets on the condensed consolidated balance sheets. 5. GOODWILL AND INTANGIBLE ASSETS, NET Goodwill The carrying amount of goodwill as of October 1, 2022 and as of December 31, 2021 was $ 128.1 million and $ 128.9 million, respectively. The change in the carrying value during the three fiscal quarters ended October 1, 2022 was due to an increase of $ 0.4 million as a result of a measurement period adjustment (see Note 3) and fluctuations in foreign currency exchange rates. ​ 14 Table of Contents Intangible Assets Intangible assets, net as of October 1, 2022 consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ October 1, 2022 ​ ​ Gross ​ Foreign ​ ​ ​ ​ ​ ​ ​ ​ Carrying ​ Currency ​ Accumulated ​ Net ​ Amount Translation Amortization Amount Trade names and trademarks ​ $ 148,100 ​ $ ( 578 ) ​ $ 21,333 ​ $ 126,189 Patented technology ​ 16,126 ​ 2 ​ 6,520 ​ 9,608 Technology ​ ​ 13,000 ​ ​ — ​ ​ 722 ​ ​ 12,278 Pool designs ​ 13,628 ​ ( 276 ) ​ 1,803 ​ 11,549 Franchise relationships ​ 1,187 ​ 25 ​ 990 ​ 222 Dealer relationships ​ 197,376 ​ 1 ​ 42,760 ​ 154,617 Backlog ​ ​ 1,600 ​ ​ ​ ​ ​ 1,600 ​ ​ — Non-competition agreements ​ 2,476 ​ — ​ 1,875 ​ 601 ​ ​ $ 393,493 ​ $ ( 826 ) ​ $ 77,603 ​ $ 315,064 ​ The Company recognized $ 7.2 million and $ 21.5 million of amortization expense related to intangible assets during the fiscal quarter and three fiscal quarters ended October 1, 2022, respectively. The Company recognized $ 5.5 million and $ 16.6 million of amortization expense related to intangible assets during the fiscal quarter and three fiscal quarters ended October 2, 2021, respectively. Intangible assets, net as of December 31, 2021 consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021 ​ ​ Gross ​ Foreign ​ ​ ​ ​ ​ ​ ​ ​ Carrying ​ Currency ​ Accumulated ​ Net ​ Amount Translation Amortization Amount Trade names and trademarks ​ $ 148,100 ​ $ 439 ​ $ 16,382 ​ $ 132,157 Patented technology ​ 16,126 ​ 65 ​ 5,205 ​ 10,986 Technology ​ ​ 13,000 ​ ​ — ​ ​ 72 ​ ​ 12,928 Pool designs ​ 13,628 ​ 265 ​ 1,101 ​ 12,792 Franchise relationships ​ 1,187 ​ 54 ​ 767 ​ 474 Dealer relationships ​ 197,376 ​ 22 ​ 30,838 ​ 166,560 Backlog ​ ​ 1,600 ​ ​ — ​ ​ 160 ​ ​ 1,440 Non-competition agreements ​ 2,476 ​ — ​ 1,503 ​ 973 ​ ​ $ 393,493 ​ $ 845 ​ $ 56,028 ​ $ 338,310 ​ The Company estimates that amortization expense related to definite-lived intangible assets will be as follows in each of the next five years and thereafter (in thousands): ​ ​ ​ ​ ​ ​ ​ Estimated Future Year Ended Amortization Expense Remainder of fiscal 2022 ​ $ 6,680 2023 ​ 26,528 2024 ​ 25,708 2025 ​ 25,550 2026 ​ 25,550 Thereafter ​ 205,048 ​ ​ $ 315,064 ​ ​ ​ ​ 15 Table of Contents 6. INVENTORIES, NET Inventories, net consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ October 1, 2022 December 31, 2021 ​ Raw materials ​ $ 96,480 ​ $ 77,510 ​ Finished goods ​ 69,950 ​ 32,046 ​ ​ ​ $ 166,430 ​ $ 109,556 ​ ​ ​ ​ 7. LONG-TERM DEBT The components of the Company’s outstanding debt obligations consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ October 1, 2022 December 31, 2021 ​ New Term Loan ​ $ 323,375 ​ $ — ​ Amended Term Loan ​ ​ — ​ ​ 284,009 ​ Less: Unamortized discount and debt issuance costs ​ ( 10,074 ) ​ ( 3,601 ) ​ Total debt ​ 313,301 ​ 280,408 ​ Less: Current portion of long-term debt ​ ( 3,250 ) ​ ( 17,220 ) ​ Total long-term debt ​ $ 310,051 ​ $ 263,188 ​ ​ On February 23, 2022, Latham Pool Products 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 New Credit Agreement were used to repay $ 294.0 million and terminate the Credit Agreement (as defined below) and for general corporate purposes. New Revolving Credit Facility On February 23, 2022, Latham Pool Products 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. The New Revolving Credit Facility may be utilized to finance ongoing general corporate and working capital needs and permits Latham Pools Products to borrow loans in U.S. Dollars, Canadian Dollars, Euros and Australian Dollars. The New Revolving Credit Facility matures on February 23, 2027. Loans outstanding under the New Revolving Credit Facility denominated in U.S. Dollars and Canadian Dollars bear interest, at the borrower’s option, at a rate per annum based on Term SOFR or CDO (each, as defined in the New Credit Agreement), as applicable, plus a margin of 3.50 %, or at a rate per annum based on the Base Rate or the Canadian Prime Rate (each, as defined in the New Credit Agreement), plus a margin of 2.50 %. Loans outstanding under the New Revolving Credit Facility denominated in Euros or Australian Dollars bear interest based on EURIBOR or the AUD Rate (each, as defined in the New Credit Agreement), respectively, plus a margin of 3.50 %. A commitment fee accrues on any unused portion of the commitments under the New Revolving Credit Facility. The commitment fee is due and payable quarterly in arrears and is, initially, 0.375 % per annum and will, thereafter, accrue at a rate per annum ranging from 0.25 % to 0.50 %, depending on the First Lien Net Leverage Ratio (as defined in the New Credit Agreement, the “First Lien Net Leverage Ratio”). Borrowings under the New Revolving Credit Facility are due at maturity. The Company incurred debt issuance costs of $ 0.8 million related to the New Revolving Credit Facility. The debt issuance costs were recorded within other assets on the condensed consolidated balance and are being amortized over the life of the New Revolving Credit Facility. The Company is required to meet certain financial covenants, including maintaining specific liquidity measurements. There are also negative covenants, including certain restrictions on the Company’s 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 October 1, 2022, there were no outstanding borrowings on the New Revolving Credit Facility. 16 Table of Contents New Term Loan Facility Pursuant to the New Credit Agreement, Latham Pool Products also borrowed $ 325.0 million in term loans. The New Term Loan Facility matures on February 23, 2029. Loans outstanding under the New Term Loan Facility 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 Credit Agreement), plus a margin ranging from 2.75 % to 3.00 %, depending on the First Lien Net Leverage Ratio. Loans under the Term Loan Facility are subject to scheduled quarterly amortization payments of $812,500, equal to 0.25 % of the initial principal amount of the Term Loan Facility. The New Credit Agreement contains customary mandatory prepayment provisions, including requirements to make mandatory prepayments with 50 % of any excess cash flow and with 100 % of the net cash proceeds from the incurrence of indebtedness not otherwise permitted to be incurred by the covenants, asset sales and casualty and condemnation events, in each case, subject to customary exceptions. The Company recorded $ 6.1 million of debt issuance costs and $ 4.9 million of debt discount related to the New Term Loan Facility as a direct reduction to the carrying amount of long-term debt on the condensed consolidated balance sheet. Outstanding borrowings as of October 1, 2022 were $ 313.3 million, net of discount and debt issuance costs of $ 10.1 million. In connection with the New Term Loan, the Company is subject to various negative, reporting, financial and other covenants, including maintaining specific liquidity measurements. As of October 1, 2022, the unamortized debt issuance costs and discount on the New Term Loan were $ 5.6 million and $ 4.5 million, respectively. The effective interest rate was 7.45 % at October 1, 2022, including the impact of the Company’s interest rate swap. As of October 1, 2022, the Company was in compliance with all financial covenants under the New Credit Agreement. 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”) in the amount of up to $ 30 million, as well as a Term Loan (as described and defined below). The Revolving Credit Facility was utilized to finance ongoing general corporate and working capital needs. The Revolving Credit Facility was terminated in connection with the Refinancing. Prior Term Loan Facility Pursuant to the Credit Agreement, Latham Pool Products also borrowed $ 215.0 million in term loans (the “Term Loan”). The Term Loan was amended on May 29, 2019, to provide additional borrowings of $ 23.0 million, which was accounted for as a modification to the Term Loan, to fund the Company’s acquisition of Narellan Group Pty Limited and its subsidiaries (the “First Amendment”). On October 14, 2020, Latham Pool Products amended the First Amendment to provide additional borrowings of $ 20.0 million, which was accounted for as new debt (the “Second Amendment”). The Second Amendment was further amended on January 25, 2021, to provide an additional incremental term loan of $ 175.0 million (the “Third Amendment”). On January 25, 2021, Latham Pool Products borrowed the incremental term loan, and the proceeds were used on February 2, 2021 to purchase and retire equity interests and to pay a distribution. On March 31, 2021, Latham Pool Products amended its Term Loan to revise the applicable reporting requirements (the “Fourth Amendment”). On November 24, 2021, Latham Pool Products amended the Term Loan to provide additional borrowings of $ 50 million (the “Fifth Amendment”). The proceeds from this incremental term loan were used to finance the Radiant Acquisition in part. The Term Loan, collectively with the First Amendment, Second Amendment, Third Amendment, the Fourth Amendment and the Fifth Amendment, is referred to as the “Amended Term Loan.” The Amended Term Loan was repaid and terminated in connection with the Refinancing. 17 Table of Contents Interest Rate Risk Interest rate risk associated with the New Credit Agreement is managed through an interest rate swap that the Company executed on April 30, 2020. The swap has an effective date of May 18, 2020 and a termination date of May 18, 2023. In February of 2022, the Company amended its interest rate swap to change the index rate from LIBOR to SOFR in connection with the entry into the New Credit Agreement. Under the terms of the amended swap, the Company fixed its SOFR borrowing rate at 0.496 % on a notional amount of $ 200.0 million. The interest rate swap is not designated as a hedging instrument for accounting purposes (see Note 2 and Note 4). ​ Debt Maturities Principal payments due on the outstanding debt in the next five fiscal years, excluding any potential payments based on excess cash flow levels, are as follows (in thousands): ​ ​ ​ ​ ​ Year Ended Term Loan Facility Remainder of fiscal 2022 ​ $ 813 2023 ​ 3,250 2024 ​ 3,250 2025 ​ 3,250 2026 ​ ​ 3,250 Thereafter ​ 309,562 ​ ​ $ 323,375 ​ The obligations under the New Credit Agreement are guaranteed by certain wholly owned subsidiaries (the “Guarantors”) of the Company as defined in the security agreement. The obligations under the New Credit Agreement are secured by substantially all of the Guarantors’ tangible and intangible assets, including their accounts receivables, equipment, intellectual property, inventory, cash and cash equivalents, deposit accounts and security accounts. The New Credit Agreement also restricts payments and other distributions unless certain conditions are met, which could restrict the Company’s ability to pay dividends. 8. PRODUCT WARRANTIES The warranty reserve activity consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Fiscal Quarters Ended ​ ​ October 1, 2022 October 2, 2021 ​ Balance at the beginning of the year ​ $ 4,909 ​ $ 2,882 ​ Accruals for warranties issued ​ 5,479 ​ 4,369 ​ Less: Settlements made (in cash or in kind) ​ ( 5,072 ) ​ ( 3,825 ) ​ Balance at the end of the year ​ $ 5,316 ​ $ 3,426 ​ ​ ​ 9. LEASES On January 1, 2022, the Company adopted ASU 2016-02, “Leases (Topic 842),” and the related amendments (collectively “ASC 842”). The optional transition method of adoption was used, in which the cumulative effect of initially applying the new standard to existing leases was $ 0.3 million to record the operating lease right-of-use assets and the related liabilities as of January 1, 2022. Under this method of adoption, the comparative information has not been revised and continues to be reported under the previously applicable lease accounting guidance (ASC 840). 18 Table of Contents For leases with initial terms greater than 12 months, the Company considers these right-of-use assets and records the related asset and obligation at the present value of lease payments over the term. For leases with initial terms equal to or less than 12 months, the Company does not consider them as right-of-use assets and instead considers them short-term lease costs that are recognized on a straight-line basis over the lease term. The Company’s leases may include escalation clauses, renewal options and/or termination options that are factored into the Company’s determination of lease term and lease payments when it is reasonably certain the option will be exercised. The Company has elected to take the practical expedient and not separate lease and non-lease components of contracts. The Company estimates an incremental borrowing rate to discount the lease payments based on information available at lease commencement because the implicit rate of the lease is generally not known. The Company leases vehicles, manufacturing facilities, office space, land, and equipment under operating leases. The Company determines if an arrangement is a lease at inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company does not have material finance leases. The components of lease expense for the fiscal quarter and three fiscal quarters ended October 1, 2022 were as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended ​ Three Fiscal Quarters Ended ​ October 1, 2022 October 1, 2022 Operating lease expense ​ $ 2,295 ​ $ 6,799 Short-term lease expense ​ 58 ​ 90 Variable lease expense ​ 141 ​ 445 Total lease expense ​ $ 2,494 ​ $ 7,334 ​ The table below presents supplemental information related to leases as of October 1, 2022: ​ ​ ​ ​ ​ ​ ​ October 1, 2022 Weighted-average remaining lease term (years) ​ ​ ​ ​ Operating leases ​ ​ 6.8 ​ Weighted-average discount rate ​ ​ ​ ​ Operating leases ​ ​ 4.9 % ​ The table below presents supplemental information related to the cash flows for operating leases recorded on the condensed consolidated statements of cash flows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ Three Fiscal Quarters Ended ​ ​ October 1, 2022 Cash paid for amounts included in the measurement of lease liabilities: ​ ​ ​ ​ Operating cash flows from operating leases ​ $ 5,249 ​ ​ The following table summarizes maturities of operating lease liabilities as of October 1, 2022 (in thousands): ​ ​ ​ ​ ​ ​ ​ Operating Leases ​ Remainder of fiscal 2022 ​ $ 2,124 ​ 2023 ​ ​ 8,162 ​ 2024 ​ ​ 7,917 ​ 2025 ​ ​ 7,259 ​ 2026 ​ ​ 5,788 ​ Thereafter ​ ​ 16,136 ​ Total lease payments ​ ​ 47,386 ​ Less: Interest ​ ​ ( 7,354 ) ​ Present value of lease liability ​ $ 40,032 ​ ​ ​ ​ 19 Table of Contents 10. NET SALES The following table sets forth the Company’s disaggregation of net sales by product line (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended ​ Three Fiscal Quarters Ended ​ ​ October 1, 2022 October 2, 2021 ​ October 1, 2022 October 2, 2021 ​ In-ground Swimming Pools ​ $ 102,334 ​ $ 84,060 ​ $ 326,290 ​ $ 285,704 ​ Covers ​ 51,934 ​ 44,125 ​ 122,848 ​ 94,354 ​ Liners ​ 35,130 ​ 33,772 ​ 138,674 ​ 111,534 ​ ​ ​ $ 189,398 ​ $ 161,957 ​ $ 587,812 ​ $ 491,592 ​ ​ ​ ​ ​ ​ 11. INCOME TAXES The effective income tax rate for the fiscal quarter and three fiscal quarters ended October 1, 2022 was 43.4 % and 65.6 %, respectively, compared to ( 223.8 )% and ( 39.3 )% for the fiscal quarter and three fiscal quarters ended October 2, 2021. The difference between the U.S. federal statutory income tax rate and the Company’s effective income tax rate for both the fiscal quarter and three fiscal quarters ended October 1, 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 the Company’s effective income tax rate for both the fiscal quarter and three fiscal quarters ended October 2, 2021 was also primarily attributable to the discrete impact of stock-based compensation expense. 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 the Company’s financial condition, results of operations or cash flows for the period ended October 1, 2022 and the Company does not expect a material impact on its future results. 20 Table of Contents 12. SHAREHOLDERS’ EQUITY Stock Split, Initial Public Offering and Reorganization On April 13, 2021, the Company’s certificate of incorporation was amended and restated. On April 13, 2021, the Company effected a 109,673.709 -for-one stock split of its issued and outstanding shares of common stock. Accordingly, all share and per share data included in these condensed consolidated financial statements and notes thereto have been adjusted retroactively to reflect the impact of the amended and restated certificate of incorporation and the stock split. On April 27, 2021, the Company completed its initial public offering (the “IPO”), pursuant to which it issued and sold 23,000,000 shares of common stock, inclusive of 3,000,000 shares sold by the Company pursuant to the full exercise of the underwriters’ option to purchase additional shares. The aggregate net proceeds received by the Company from the IPO were $ 399.3 million, after deducting underwriting discounts and commissions and other offering costs. Prior to the closing of the Company’s IPO on April 27, 2021, the Company’s parent entity, Parent, merged with and into Latham Group, Inc. (the “Reorganization”). Offering of Common Stock On January 11, 2022, the Company completed an offering of 13,800,000 shares of common stock, par value $ 0.0001 per share, 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. The Company 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 the Company’s stockholders, primarily investment funds managed by the Sponsor and Wynnchurch Capital, L.P., and also a small percentage of shares of common stock owned by some of the Company’s directors and executive officers. Repurchase Program On May 10, 2022, the Company approved a stock repurchase program (the “Repurchase Program”), which authorized the Company to repurchase up to $ 100 million of the Company’s shares of common stock over the next three years . The Company may effect these repurchases in open market transactions, privately negotiated purchases or other acquisitions. The Company is not obligated to repurchase any of its shares of its common stock under the Repurchase Program and the timing and amount of any repurchases will depend on market conditions, the Company’s stock price, alternative uses of capital, the terms of the Company’s debt instruments and other factors. During the fiscal quarter ended July 2, 2022, the Company 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 October 1, 2022, approximately $ 85.0 million remained available for share repurchases pursuant to the Repurchase Program. The Company accounts for the excess of the repurchase price over the par value of shares acquired as a reduction to additional paid-in capital. ​ 21 Table of Contents 13. STOCK-BASED COMPENSATION On April 12, 2021, the Company’s stockholders approved the 2021 Omnibus Incentive Plan (the “Omnibus Incentive Plan”), which became effective on April 22, 2021, upon pricing of the IPO. The Omnibus Incentive Plan provides for the issuance of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based and cash-based awards. The maximum aggregate number of shares reserved for issuance under the Omnibus Incentive Plan is 13,170,212 shares. The maximum grant date fair value of cash and equity awards that may be awarded to a non-employee director under the Omnibus Incentive Plan during any one fiscal year, together with any cash fees paid to such non-employee director during such fiscal year, is $ 750,000 . The following table summarizes the Company’s stock-based compensation expense: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended ​ Three Fiscal Quarters Ended ​ ​ October 1, 2022 October 2, 2021 ​ October 1, 2022 October 2, 2021 ​ Cost of sales ​ $ 730 ​ $ 1,914 ​ $ 3,046 ​ $ 6,837 ​ Selling, general and administrative ​ 6,331 ​ 25,689 ​ 37,369 ​ 97,741 ​ ​ ​ $ 7,061 ​ $ 27,603 ​ $ 40,415 ​ $ 104,578 ​ ​ As of October 1, 2022, total unrecognized stock-based compensation expense related to all unvested stock-based awards was $ 32.7 million, which is expected to be recognized over a weighted-average period of 1.21 years. ​ The following table sets forth the significant assumptions used in the Black-Scholes option-pricing model on a weighted-average basis to determine the fair value of option awards granted: ​ ​ ​ ​ ​ ​ ​ Three Fiscal Quarters Ended ​ ​ ​ October 1, 2022 Risk-free interest rate 2.04 % Expected volatility 39.67 % Expected term (in years) 6.25 ​ Expected dividend yield 0.00 % ​ Restricted Stock Awards The following table represents the Company’s restricted stock awards activity during the three fiscal quarters ended October 1, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ Average Grant- ​ Shares Date Fair Value Outstanding at January 1, 2022 5,803,124 ​ $ 19.00 Granted — ​ — Vested ( 1,373,260 ) ​ 19.00 Forfeited ( 480,385 ) ​ 19.00 Outstanding at October 1, 2022 3,949,479 ​ $ 19.00 ​ 22 Table of Contents Restricted Stock Units The following table represents the Company’s restricted stock units activity during the three fiscal quarters ended October 1, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ Average Grant- ​ ​ Shares ​ Date Fair Value Outstanding at January 1, 2022 278,591 ​ $ 19.08 Granted 210,012 ​ 10.81 Vested ( 182,383 ) ​ 19.00 Forfeited ( 17,324 ) ​ 19.00 Outstanding at October 1, 2022 288,896 ​ $ 13.12 ​ Stock Options The following table represents the Company’s stock option activity during the three fiscal quarters ended October 1, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- Weighted- ​ ​ ​ ​ ​ ​ ​ Average ​ Average ​ ​ ​ ​ ​ ​ ​ Exercise Price ​ Remaining ​ Aggregate ​ Shares per Share Contract Term Intrinsic Value ​ ​ ​ ​ ​ (in years) ​ (in thousands) Outstanding on January 1, 2022 822,886 ​ $ 19.08 ​ ​ ​ ​ Granted 1,500,149 ​ ​ 13.30 ​ Exercised — ​ — ​ Expired ​ (1,557) ​ ​ 19.00 ​ ​ ​ ​ ​ Forfeited ( 240,420 ) ​ 17.38 ​ Outstanding at October 1, 2022 2,081,058 ​ $ 15.11 9.15 ​ $ — Vested and expected to vest at October 1, 2022 2,081,058 ​ $ 15.11 9.15 ​ $ — Options exercisable at October 1, 2022 179,714 ​ 19.00 8.26 ​ — ​ The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock . The weighted average grant-date fair value of stock options granted during the three fiscal quarters ended October 1, 2022 was $ 5.56 per share. 14. NET INCOME (LOSS) PER SHARE Basic and diluted net income (loss) per share attributable to common stockholders was calculated as follows (in thousands, except share and per share data): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended ​ Three Fiscal Quarters Ended ​ ​ October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 ​ Numerator: ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) attributable to common stockholders ​ $ 11,876 ​ $ ( 11,296 ) ​ $ 13,339 ​ $ ( 56,361 ) ​ Denominator: ​ ​ ​ ​ ​ ​ Weighted-average common shares outstanding ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ ​ 113,171,655 ​ ​ 112,153,832 ​ ​ 113,521,425 ​ ​ 110,121,240 ​ Diluted ​ ​ 113,202,846 ​ ​ 112,153,832 ​ ​ 114,867,164 ​ ​ 110,121,240 ​ Net income (loss) per share attributable to common stockholders: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.10 ​ $ ( 0.10 ) ​ $ 0.12 ​ $ ( 0.51 ) ​ Diluted ​ $ 0.10 ​ $ ( 0.10 ) ​ $ 0.12 ​ $ ( 0.51 ) ​ ​ ​ 23 Table of Contents As of October 1, 2022 and December 31, 2021, 113,171,655 and 113,642,487 shares of common stock are issued and outstanding for accounting purposes, respectively. ​ The following table includes the number of shares that may be dilutive common shares in the future that were not included in the computation of diluted net income (loss) per share because the effect was anti-dilutive: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended Three Fiscal Quarters Ended ​ ​ ​ October 1, 2022 October 2, 2021 ​ October 1, 2022 October 2, 2021 ​ Restricted stock awards 3,842,873 2,952,422 1,280,958 6,813,166 ​ Restricted stock units 212,183 146,398 108,570 84,866 ​ Stock options 1,963,331 — 1,655,462 4,235 ​ ​ ​ 15. RELATED PARTY TRANSACTIONS BrightAI Services Starting in 2020, BrightAI has rendered services to the Company, for which the cost was capitalized as internal-use software. A co-founder of BrightAI Services has served on the Company’s board of directors since December 9, 2020. During the three fiscal quarters ended October 1, 2022 and the year ended December 31, 2021, the Company incurred $ 0.4 million and $ 2.1 million, respectively, associated with services performed by BrightAI, which is recorded as construction in progress within property and equipment, net on the condensed consolidated balance sheet as of October 1, 2022. As of October 1, 2022 and December 31, 2021, the Company had accounts payable related to BrightAI of $ 0.8 million and $ 0.9 million, respectively. Expense Reimbursement and Management Fees The Company had an expense reimbursement agreement (the “management fee arrangement”) with the Sponsor and Wynnchurch Capital, L.P. for ongoing consulting and advisory services. The management fee arrangement provided for the aggregate payment of up to $ 1.0 million each year for reimbursement of expenses incurred with services provided and, depending on the extent of services provided, management fees. The management fee arrangement terminated upon consummation of the Company’s IPO. The Company entered into a Stockholders’ Agreement with the Sponsor and Wynnchurch Capital, L.P. on April 27, 2021. The Stockholders’ Agreement requires the Company to reimburse the Sponsor and Wynnchurch Capital, L.P. the reasonable out-of-pocket costs and expenses in connection with monitoring and overseeing their investment in the Company. There were no management fees incurred by the Company during the fiscal and three fiscal quarters ended October 1, 2022 and October 2, 2021. The Company recognized $ 0.2 million for the reimbursement of out-of-pocket costs and expenses to the Sponsor and $ 0.1 million for the reimbursement of out-of-pocket costs and expenses to the Wynnchurch Capital, L.P. during the fiscal quarter and three fiscal quarters ended October 1, 2022. The Company recognized less than $ 0.1 million for the reimbursement of out-of-pocket costs and expenses to the Sponsor and Wynnchurch Capital, L.P. during three fiscal quarters ended October 2, 2021. As of October 1, 2022, there was $ 0.2 million outstanding amounts payable to the Sponsor and no outstanding amounts payable to Wynnchurch Capital, L.P. As of December 31, 2021, there were no outstanding amounts payable to the Sponsor and Wynnchurch Capital, L.P. ​ 16. SUBSEQUENT EVENTS On November 8, 2022, the Company approved a cost reduction plan focused on efforts to improve efficiencies and decrease costs. The plan involves the closure of the Company’s manufacturing facility in Bossier City, Louisiana, and a reduction to the Company’s current workforce. The Company expects 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 in the first quarter of 2023. ​ ​ 24 Table of Contents