What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-07 compared with 2022-03-10 · 177 added, 232 removed, 287 unchanged (59% of the section changed)

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Business,” and our audited consolidated financial statements and related notes for the three years ended December 31, 2022, 2021 and 2020, included elsewhere in this Annual Report.

Cautionary Note Regarding Forward-Looking Statements

This discussion contains forward-looking statements that involve risk, assumptions and uncertainties, such as statements of our plans, objectives, expectations, intentions and forecasts.

These forward-looking statements are generally identified by the use of forward-looking terminology, including the terms “anticipate,” “believe,” “confident,” “continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and, in each case, their negative or other various or comparable terminology.

Our actual results and the timing of selected events could differ materially from those discussed in these forward-looking statements as a result of several factors, including those set forth under the section of this Annual Report on Form 10-K titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

Important factors that could cause our results to vary from expectations include, but are not limited to secular shifts in consumer demand for swimming pools and spending on outdoor living spaces;

slow pace of material conversion from concrete pools to fiberglass pools in the pool industry;

general economic conditions and uncertainties affecting markets in which we operate and economic volatility that could adversely impact our business, including the COVID-19 pandemic;

changes in access to consumer credit or increases in interest rates impacting consumers’ ability to finance their purchases of pools;

the impact of weather on our business;

our ability to attract new customers and retain existing customers;

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

the ability of our suppliers to continue to deliver the quantity or quality of materials sufficient to meet our needs to manufacture our products;

the availability and cost of third-party transportation services for our products and raw materials;

product quality issues;

our ability to successfully defend litigation brought against us;

our ability to adequately obtain, maintain, protect and enforce our intellectual property and proprietary rights and claims of intellectual property and proprietary right infringement, misappropriation or other violation by competitors and third parties;

failure to hire and retain qualified employees and personnel;

exposure to risks associated with international sales and operations, including foreign currency exchange rates, corruption and instability;

security breaches, cyber-attacks and other interruptions to our and our third-party service providers’ technological and physical infrastructures;

catastrophic events, including war, terrorism and other international conflicts, public health issues or natural catastrophes and accidents;

risk of increased regulation of our operations, particularly related to environmental laws;

fluctuations in our operating results;

inability to compete successfully against current and future competitors;

and other risks, uncertainties and factors set forth in this Annual Report on Form 10-K, 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 Annual Report on Form 10-K and are based on assumptions and subject to risks and uncertainties.

Given these uncertainties, you should not place undue reliance on these forward-looking statements.

These forward-looking statements represent our estimates and assumptions only as of the date of this Annual Report on Form 10-K and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Annual Report on Form 10-K.

We anticipate that subsequent events and developments will cause our views to change.

You should read this Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect.

Our forward-looking statements do not reflect the potential impact of any future acquisitions, merger, dispositions, joint ventures or investments we may undertake.

We qualify all of our forward-looking statements by these cautionary statements.

We are the largest designer, manufacturer, and marketer of in-ground residential swimming pools in North America, Australia, and New Zealand.

We hold the #1 market position in North America in every product category in which we compete.

We hold the #1 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.

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In an industry that has traditionally marketed on a business-to-business basis (pool manufacturer to dealer), we pioneered the first “direct-to-homeowner” digital and social marketing strategy that has transformed the homeowner’s purchase journey.

Through this marketing strategy, we are able to create demand for our pools and generate and provide high quality, purchase-ready consumer leads to our dealer partners.

Through this marketing strategy, we are able to create demand for our pools and to provide high quality, purchase-ready consumer leads to our dealer partners.

Partnership with our dealers is integral to our collective success, and we have enjoyed long-tenured relationships averaging over 14 years.

We support our dealer network with business development tools, co-branded marketing programs and in-house training, as well as an operations platform consisting of over 2,300 employees across over 30 facilities.

We support our dealer network with business development tools, co-branded marketing programs, and in-house training, as well as an operations platform consisting of over 2,000 employees across over 30 locations.

The full resources of our company are dedicated to designing and manufacturing high-quality pool products, with the homeowner in mind, and positioning ourselves as a value-added partner to our dealers.

As a result of this approach, 2021 marked our 12 th consecutive year of net sales growth, Adjusted EBITDA growth and Adjusted EBITDA margin expansion.

As a result of this approach, 2022 marked our 13 th consecutive year of net sales growth and Adjusted EBITDA growth.

Net income does not adhere to this trend.

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● Increase in net sales of 10.4%, or $65.2 million, to $695.7 million for the year ended December 31, 2022, compared to $630.5 million for the year ended December 31, 2021.

● Increase in net loss of $78.3 million, to $62.3 million for the year ended December 31, 2021, compared to a net income of $16.0 million for the year ended December 31, 2020, representing a 9.9% net loss margin for the year ended December 31, 2021.

● Decrease in net loss of $56.6 million, to $5.7 million for the year ended December 31, 2022, compared to a net loss of $62.3 million for the year ended December 31, 2021, representing a 0.8% net loss margin for the year ended December 31, 2022.

● Increase in Adjusted EBITDA (as defined below) of $3.5 million, to $143.3 million for the year ended December 31, 2022, compared to $139.8 million for the year ended December 31, 2021.

Debt Refinancing

On February 23, 2022, we entered into an agreement (the “New Credit Agreement”) with Barclays Bank PLC, which provides a senior secured multicurrency revolving line of credit (the “New Revolving Credit Facility”) in an initial principal amount of $75.0 million and a U.S.

Dollar senior secured term loan facility (the “New Term Loan Facility”) in an initial principal amount of $325.0 million.

On the closing date, proceeds under the agreement were used to repay and replace $294.0 million under, and terminate, the Credit Agreement and for general corporate purposes.

Initial Public Offering

On April 27, 2021, we completed our initial public offering (the “IPO”) in which we sold 23,000,000 shares of common stock, inclusive of 3,000,000 shares sold by us pursuant to the full exercise of the underwriters’ option to purchase additional shares.

The aggregate net proceeds received by us from the IPO were $399.3 million, after deducting underwriting discounts and commissions and other offering costs.

We used the net proceeds to (i) pay down $152.7 million of the Amended Term Loan (as defined below) under the Credit Agreement (as defined below), (ii) repay the $16.0 million outstanding on the Revolving Credit Facility (as defined below), (iii) repurchase 12,264,438 shares of common stock from certain existing shareholders for $216.7 million and (iv) fund general corporate requirements, including working capital, for $13.9 million.

Contemporaneously with the pricing of the IPO, on April 22, 2021, we put in place our Omnibus Incentive Plan, pursuant to which we granted to certain of our employees restricted stock awards, restricted stock units and option awards (the “Omnibus Plan”).

Secondary Offering

On January 11, 2022, we completed an offering of 13,800,000 shares of common stock, including the exercise in full by the underwriters of their option to purchase up to 1,800,000 additional shares of common stock, at a public offering price of $19.50 per share.

All of the net proceeds from this offering were used to purchase 13,800,000 shares of our common stock from certain of our stockholders.

In connection with the offering we incurred approximately $12.9 million in expenses, including underwriter fees.

Reorganization

Prior to the closing of the IPO, our parent entity, Latham Investment Holdings, LP (“Parent”) merged with and into Latham Group, Inc., with Latham Group, Inc.

surviving the merger (the “Reorganization”).

The purpose of the Reorganization was to reorganize our structure so that our existing investors would own only common stock rather than limited partnership interests in our Parent.

In connection with the Reorganization, 194,207,115 Class A units of our Parent (“Class A units”) were converted into 97,187,596 shares of our common stock and 26,158,894 Class B units of our Parent were converted into 4,145,987 shares of common stock and 8,340,126 shares of restricted stock.

The Reorganization was accounted for as a transaction between entities under common control and retrospectively applied.

On April 13, 2021, our Board of Directors approved a 109,673.709-for-one stock split of our common stock, par value $0.0001.

Accordingly, all share and per share data for all periods presented have been adjusted retroactively to reflect the impact of the amended certificate of incorporation and the stock split.

Charter Amendment

On April 13, 2021, our certificate of incorporation was amended, which amended and restated certain terms of the certificate of incorporation.

Under the amended certificate of incorporation, we had the authority to issue 500,000,000 shares of common stock, par value $0.0001 per share.

On April 22, 2021, as part of the Reorganization, our certificate of incorporation was further amended and restated to, among other things, increase the authorized shares to 1,000,000,000, of which 900,000,000 are shares of common stock, par value $0.0001 per share and 100,000,000 are shares of preferred stock, par value 0.0001 per share.

Business Update

Market conditions continue to evolve.

Macroeconomic uncertainty is affecting consumer spending and softening demand for consumer durables, resulting in declines in U.S.

new in-ground pool installations in 2022.

We anticipate further net sales declines in our in-ground swimming pool product line in 2023.

We continue to see destocking of packaged pool inventory at the wholesale distribution-level, and we expect normalization of inventory levels to remain a headwind.

We believe continued progress on fiberglass conversion efforts, especially from concrete, will be a modest tailwind as we continue to work to drive homeowner and dealer awareness and adoption.

We continue to take a disciplined approach to capital investments, with the focus on the completion of previously announced projects.

This includes the completion of our Kingston, Ontario facility as well as our acquired fiberglass manufacturing assets in Seminole, Oklahoma.

The Kingston and Seminole facilities for production will give us the opportunity to reduce freight costs, tighten our lead times, and tap into large markets with strong fiberglass conversion opportunities.

We have responded to economic uncertainty 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 closure of our Bossier City, Louisiana facility in the first quarter of 2023.

During the year ended December 31, 2022, we recognized costs related to the plan totaling $1.1 million, comprised primarily of $1.0 million for severance and related costs and $0.1 million of fixed asset and facility related expenses.

The remaining costs under the plan of approximately $0.5 million are expected to be incurred and recognized in 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.

Leadership Transition

On January 19, 2023, we announced that Robert L.

Masson II will step down as our Chief Financial Officer for family reasons, effective March 17, 2023.

Mark Borseth, who previously served as Latham’s Chief Financial Officer from February 2020 to July 2022, rejoined Latham as a strategic advisor effective February 13, 2023.

On March 18, 2023, Mr.

Borseth will become the Interim Chief Financial Officer.

A search for a permanent Chief Financial Officer is underway.

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 outstanding shares 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 year ended December 31, 2022, we repurchased and concurrently retired 4,483,620 shares of our common stock for an aggregate amount of $23.0 million, pursuant to the Repurchase Program.

As of December 31, 2022, approximately $77.0 million remained available for share repurchases pursuant to our Repurchase Program.

Key Factors Affecting our Performance

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Through this marketing strategy, we are able to create demand for our pools and generate and provide high quality, purchase-ready consumer leads to our dealer partners.

In order to strengthen our relationship with our loyal dealer partners, we have implemented “Latham Grand,” a key dealer strategy whereby we have secured exclusivity from over 250 of our largest dealers in North America, which also includes the nation’s largest franchised dealer network, Premier Pools & Spas.

In order to strengthen our relationship with our loyal dealer partners, we have implemented “Latham Grand,” a key dealer strategy whereby we have secured exclusivity from over 250 of our largest dealers in North America, which also includes the United States’ largest franchised dealer network, Premier Pools & Spas.

We also have a strong distribution network as a result of over 450 distributor branch locations that represent our products.

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We have directed a significant portion of our advertising spend to digital channels, including social media and search advertising.

Our improved digital marketing engine has the ability to strategically target market spend and generate leads in territories where dealers have capacity to install more pools, markets where we are underpenetrated, or simply into the largest in-ground swimming pool markets.

Our improved digital marketing engine has the ability to strategically target market spend and to generate leads in territories where dealers have capacity to install more pools, markets where we are underpenetrated, or simply into the largest in-ground swimming pool markets.

Our volume of product sales in a given period will be impacted by changes in our distribution platform and by our ability to generate leads for our dealers.

● Material conversion:

We have continued to increase sales of our products through our focused efforts to drive material conversion and market penetration of our products, specifically our fiberglass pools, which continue to take market share from traditional concrete pools and enable dramatically improved economics for consumers, dealers and for pool installers.

We believe that this will be a long-term trend toward material conversion from traditional concrete pools.

We believe that our fiberglass pools offer a compelling value proposition due to their lower up-front and lifecycle cost of ownership, less maintenance, higher quality, lower usage of harsh chemicals, quicker installation and more convenient experience, compared to products manufactured from traditional materials, and we anticipate that sales of our fiberglass pool products will continue to benefit from material conversion.

We believe that our fiberglass pools offer a compelling value proposition because of their lower up-front and lifecycle cost of ownership, less maintenance, higher quality, lower usage of harsh chemicals, quicker installation, and more convenient experience, compared to products manufactured from traditional materials.

We anticipate that sales of our fiberglass pool products will continue to benefit from material conversion.

The success of our efforts to drive conversion during any given period will impact the volume of our products sold during that period.

● Product Innovation :

We continue to develop and introduce innovative products to accelerate material conversion and expand our markets.

We continue to develop and introduce innovative products to accelerate material conversion and to expand our markets.

The continuous evolution and expansion of our product portfolio is critical to our sales growth, expanding market share, and overall success.

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Demand for our products is affected by a number of economic factors impacting our customers and consumers.

The in-ground swimming pool market depends in part on home equity financing, and accordingly, the level of equity in homes will affect consumers’ ability to obtain a home equity line of credit and engage in backyard renovations that would result in purchases of our products.

Customers typically pay for their new pools from assets on hand or from borrowing.

A frequent source of borrowing is home equity financing, and accordingly, the level of equity in homes will affect consumers’ ability to obtain a home equity line of credit and to engage in backyard renovations that

would result in purchases of our products.

Demand for our products is also affected by the level of interest rates and the availability of credit, consumer confidence and spending, housing affordability, demographic trends, employment levels, and other macroeconomic factors that may influence the extent to which consumers engage in renovations to their backyard, including pool installation projects to enhance the outdoor living spaces of their homes.

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In general, 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.

Calendar years having severe weather also may play a role in affecting sales growth, as particularly rainy or cold years tend to slow the volume of sales, including as a result of complicating conditions for pool installations.

Catastrophic events, such as hurricanes, tornadoes, and earthquakes, can cause interruptions to our operations and these scenarios are at least partially mitigated by our geographic diversity, both across the United States and through international markets.

In general, our products are priced to be competitive in the in-ground swimming pool market and to keep in line with changes in our input costs.

Severe weather also may play a role in affecting sales growth, as particularly rainy or cold years tend to slow the volume of sales, including as a result of complicating conditions for pool installations.

Catastrophic events, such as hurricanes, tornadoes, and earthquakes can cause interruptions to our operations.

These scenarios are partially mitigated by our geographic diversity, both across the United States and through international markets.

In general, our products are priced to be competitive in the in-ground swimming pool market, including the prices for concrete pools, and to keep in line with changes in our input costs.

Cost and Availability of Materials

Raw material costs, including costs of PVC, galvanized steel, fiberglass, aluminum, carbon fiber, Kevlar fiber, various resins, gelcoat, polypropylene fabric, ceramic and roving, represent a majority of our cost of sales.

Our contracts with key suppliers are typically negotiated on an annual basis.

Raw material costs, including costs of PVC, galvanized steel, fiberglass, aluminum, carbon fiber, Kevlar fiber, various resins, gelcoat, polypropylene fabric, ceramics, and roving, represent a majority of our cost of sales.

Our supply agreements with key suppliers are typically negotiated on an annual basis.

The cost of the raw materials used in our manufacturing processes is subject to volatility and has been affected by changes in supply and demand.

We have no fixed-price contracts with any of our major vendors.

We have minimal fixed-price contracts with our major vendors.

We have not entered into hedges of our raw material costs at this time, but we may choose to enter into such hedges in the future.

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Changes in prices of our raw materials have a direct impact on our cost of sales.

In the second and third quarters of 2021, we experienced supply chain disruptions, especially for the resin used in making fiberglass pools.

Due to the supply chain disruption, we experienced manufacturing inefficiencies and fixed cost deleverage, as well as lower margins due to lower fiberglass pool sales.

Despite strong demand for our products, we estimate that the resin shortfall limited our North American fiberglass production to just 58% of our capacity in 2021.

We have worked with our existing suppliers to increase their shipments to us and have secured additional supplies of resin during the fourth quarter of 2021, with additional sources expected to begin supplying our operations in the first quarter of 2022.

We have also increased our warehousing capacity for key raw materials to help mitigate any future supply issues.

We believe that our efforts to secure our resin supply will allow us to ramp up production to match our order growth and to improve our sales mix through higher fiberglass pool sales.

We have also experienced raw material inflation in 2021.

Although we have taken pricing action to minimize the impact on our profitability, we chose not to raise pricing of our fiberglass pools order backlog to protect our long-term relationships with our dealer partners, with the pricing increases applying only to new orders.

This strategic decision resulted in a timing gap between raw material inflation and pricing actions that impacted our profitability in the year ended December 31, 2021.

The gap between raw material inflation and pricing actions was a leading driver of gross margin compression in the year ended December 31, 2021.

We expect that the gap will lessen as we work through our order backlog and the pricing action that we have taken will reverse the gross margin compression due to a higher gross margin from the sale of fiberglass pools, and an increase in gross margin from a higher mix of sales from fiberglass pools.

Acquisitions and Partnerships

On May 31, 2019, we acquired Narellan, a fiberglass pool manufacturer based in Australia with existing operations in Australia, New Zealand and Canada.

The acquisition expanded our market share giving us a broader geographical footprint and an increase in dealer and franchise relationships.

On October 22, 2020, we acquired GLI, which specializes in manufacturing custom vinyl pool liners and safety covers.

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The acquisition expands our product portfolio into vinyl-lined and aluminum-walled swimming pools.

The consolidated financial statements include the results of operations of the Narellan, GLI and Radiant acquisitions since their respective acquisition dates.

On November 8, 2022, we acquired certain fiberglass pool manufacturing assets in Seminole, Oklahoma, that qualified as a business combination.

This acquisition will replace lost fiberglass manufacturing capacity in Odessa, TX because of a plant fire and place our production closer to strong consumer markets in the region.

The consolidated financial statements include the results of operations of these acquisitions since their respective acquisition dates.

The total purchase consideration was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition, as determined by management.

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On December 17, 2021, Premier Pools & Spas issued additional non-voting common units.

Our ownership interest in Premier Pools & Spas after the issuance of additional non-voting common units is 18.2% while our voting interest remains 20.1%.

Our ownership interest in Premier Pools & Spas after the

issuance of additional non-voting common units is 18.2% while our voting interest remains 20.1%.

The purpose of this investment in Premier Pools & Spas is to help expand our sales and distribution channels.

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Our investment in Premier Pools & Spas is reflected as an equity method investment on our consolidated balance sheet as of December 31, 2022, and our proportionate share of earnings or losses of Premier Pools & Spas is recognized in earnings (losses) from equity method investment in our consolidated statement of operations on a three-month lag.

We seek to continue to enhance our gross margins by improving the mix of products we sell, improving efficiency across our operations, including by investing in, and expanding, our digitally-enabled lead sourcing capabilities, expanding our specialized training opportunities, such as “Latham University,” and sales support initiatives, such as localized digital marketing spend, co-branding, enhanced product literature, in-store display samples and social media initiatives.

Impact of COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide.

In response to the COVID-19 pandemic, federal, state and local governments put in place travel restrictions, quarantines, “shelter-in-place” orders, and various other restrictive measures in an attempt to control the spread of the disease.

Such restrictions or orders have resulted in, and continue to result in, business closures, work stoppages, slowdowns and delays, among other measures that affect our operations, as well as customer demand and the operations of our suppliers.

Since the onset of the COVID-19 pandemic, we have been focused on protecting our employees’ health and safety, meeting our customers’ needs as they navigate an uncertain financial and operating environment, working closely with our suppliers to protect our ongoing business operations and rapidly adjusting our short-, medium- and long-term operational plans to proactively and effectively respond to the current and potential future public health crises.

While the COVID-19 pandemic presents very serious concerns for our business and operations, our employees and their families, our customers and our suppliers, we believe that we are adapting well to the wide-ranging changes that the global economy is currently undergoing, and we remain confident that we will continue to maintain business continuity, produce and sell our products safely and in compliance with applicable laws and governmental orders and mandates, maintain our robust and flexible supply chains and be in a strong position to maintain financial flexibility in the event of a potentially extended economic downturn.

To mitigate the impact of the COVID-19 pandemic on our business, we increased frequency and intensity of cleaning of our properties, implemented policies to enable our factory employees to work flexible working hours, shifted our corporate employees to remote work, temporarily stopped hiring, temporarily cut salaries (which cuts we repaid to our employees later in the year), and have greatly reduced travel for our employees.

Substantially all of our plants have remained operational throughout the pandemic.

We did not experience any significant impacts on our liquidity as a result of the COVID-19 pandemic.

Although we have implemented measures to mitigate the impact of the COVID-19 pandemic on our business, financial condition and results of operations, we expect that these measures may not fully mitigate the impact of the COVID-19 pandemic on our business, financial condition and results of operations.

We cannot predict the degree to, or the period over, which we will be affected by the pandemic and resulting governmental and other measures.

The global impact of the COVID-19 pandemic continues to rapidly evolve, and we will continue to monitor the situation closely.

As the COVID-19 pandemic continues, it may also have the effect of heightening many of the risks described in “Risk Factors” in this Annual Report.

See “Risk Factors — Risks Related to Our Operations — The current outbreak of the COVID-19, or the future outbreak of any other highly infectious or contagious diseases, has caused, and may continue to cause, disruption to our business and operations” for a further discussion of the adverse impacts of the COVID-19 pandemic on our business.

We seek to continue to enhance our gross margins by improving the mix of products we sell, reducing fixed costs per unit, improving efficiency across our operations, including by investing in, and expanding, our digitally-enabled lead sourcing capabilities, expanding our specialized training opportunities such as “Latham University,” and sales support initiatives such as localized digital marketing spend, co-branding, enhanced product literature, in-store display samples, and social media initiatives.

Key Performance Indicators

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We sell liners for the interior surface of vinyl pools (including pools that were not manufactured by us).

We also sell all-season covers, which are winterizing mesh and solid pool covers that protect pools against debris and cold or inclement weather and automatic safety covers for pools that can be operated with a switch.

We also sell all-season covers, which are winterizing mesh or solid pool covers that protect pools against debris and cold or inclement weather, and automatic safety covers for pools that can be operated with a switch.

Our sales are made through one-step and two-step business-to-business distribution channels.

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Gross margin is gross profit as a percentage of our net sales.

Gross margin is dependent upon several factors, such as changes in prices of raw materials, the volume and relative sales mix among product lines, the average price of our products sold and plant performance, among other factors.

Gross margin depends upon several factors, such as the prices we charge buyers, changes in prices of raw materials, the volume and relative sales mix among product lines, and plant performance, among other factors.

Gross margin is also impacted by the costs of distribution and occupancy costs, which can vary.

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Adjusted EBITDA and Adjusted EBITDA Margin

We use Adjusted EBITDA and Adjusted EBITDA margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to establish our annual management incentive bonus plan compensation and to compare our performance against that of other peer companies using similar measures.

We define Adjusted EBITDA as net income (loss) plus (i) depreciation and amortization, (ii) interest expense, (iii) income tax (benefit) expense, (iv) loss on sale and disposal of property and equipment, (v) restructuring charges, (vi) management fees, (vii) stock-based compensation expense, (viii) unrealized (gains) losses on foreign currency transactions, (ix) strategic initiative costs, (x) acquisition and integration related costs, (xi) other and (xii) IPO costs.

We use Adjusted EBITDA and Adjusted EBITDA margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to utilize as a significant performance metric in our annual management incentive bonus plan compensation and to compare our performance against that of other peer companies using similar measures.

We define Adjusted EBITDA as net income (loss) plus (i) depreciation and amortization, (ii) interest expense, (iii) income tax (benefit) expense, (iv) loss (gain) on sale and disposal of property and equipment, (v) restructuring charges, (vi) stock-based compensation expense, (vii) unrealized (gains) losses on foreign currency transactions, (viii) strategic initiative costs, (ix) acquisition and integration related costs, (x) loss on extinguishment of debt, (xi) underwriting fees related to offering of common stock, (xii) the Odessa fire and other such unusual events, (xiii) IPO costs and (xiv) other.

We believe excluding these items allows for better comparison of our financial results across reporting periods.

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We also use Adjusted EBITDA and Adjusted EBITDA margin for planning purposes, assessing our financial performance, and other strategic decisions.

For a discussion of Adjusted EBITDA and Adjusted EBITDA margin and the limitations on their use, and the reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure, and our calculation of Adjusted EBITDA margin see “— Non-GAAP Financial Measures” below.

For a discussion of Adjusted EBITDA and Adjusted EBITDA margin and the limitations on their use, and the reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure, and our calculation of Adjusted EBITDA margin see “— Non-GAAP Financial Measures” below.

Results of Operations

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Selling, general, and administrative expense

(Loss) income from operations

Underwriting fees related to offering of common stock

Income (loss) from operations

Other expense (income):

Interest expense

Other (income) expense, net

Loss on extinguishment of debt

Other expense (income), net

Total other expense (income), net

Earnings from equity method investment

(Loss) income before income taxes

Income (loss) before income taxes

Income tax expense

Net (loss) income

Adjusted EBITDA

Net sales was $695.7 million for the year ended December 31, 2022, compared to $630.5 million for the year ended December 31, 2021.

The $227.1 million, or 56.3%, increase in net sales was due to a $171.7 million increase from volume and a $55.4 million increase from pricing.

The $171.7 million volume increase spanned our product lines and was primarily attributable to strong market demand, homeowner preferences for Latham’s products, and expanded strategic partnerships within our network of dealers, and also includes $68.5 million due to having a full year of GLI’s net sales in our net sales in the year ended December 31, 2021.

The $65.2 million, or 10.4%, increase in net sales was driven by a $109.6 million increase from pricing, partially offset by a $44.4 million decrease from volume.

The $109.6 million price increase reflects the impact of pricing actions to address inflation.

The $44.4 million volume decrease was largely in packaged pools, driven by continued destocking of inventory in the wholesale distribution channel.

The increase in total net sales across our product lines was $17.0 million for in-ground swimming pools, $26.3 million for covers and $21.9 million for liners.

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Gross margin decreased by 1.3% to 31.1% for the year ended December 31, 2022, compared to 32.4% for the year ended December 31, 2021.

The $165.7 million, or 63.6%, increase in cost of sales was primarily the result of the overall increase in sales volume, cost inflation and $8.7 million of non-cash stock-based compensation expense.

The 3.0% decrease in gross margin was primarily driven by supply chain headwinds, strategic decisions around re-pricing our order backlog, and stock-based compensation expense.

The $53.0 million, or 12.4%, increase in cost of sales was primarily the result of cost inflation, partially offset by a $4.9 million decrease in non-cash stock-based compensation expense.

The 1.3% decrease in gross margin was primarily driven by the impact of inflation and negative fixed cost leverage.

Negative fixed cost leverage was driven by volume declines, primarily in packaged pools, driven by continued destocking of inventory in the wholesale distribution channel.

Selling, General, and Administrative Expense

Selling, general and administrative expense was $217.8 million for the year ended December 31, 2021, compared to $85.5 million for the year ended December 31, 2020, and increased as a percentage of net sales by 13.3%.

The $132.3 million, or 154.6% increase in selling, general and administrative expense was primarily due to a $118.3 million increase in stock-based compensation expense, $5.1 million in wages from an increase in headcount, particularly for customer-facing activities to support future business growth, a $5.1 million increase in expense related to the acquisition of GLI, a $2.2 million increase due to legal, accounting and professional fees incurred in connection with our IPO that were not capitalizable, and ongoing public company costs.

Selling, general, and administrative expense was $146.8 million for the year ended December 31, 2022, compared to $217.8 million for the year ended December 31, 2021, and decreased as a percentage of net sales by 13.4%.

The $71.0 million, or 32.6% decrease in selling, general, and administrative expense was primarily driven by a $73.2 million decrease in non-cash stock-based compensation expense.

Amortization was $28.2 million for the year ended December 31, 2022, compared to $22.6 million for the year ended December 31, 2021.

The $5.3 million, or 30.1% increase in amortization was due to the increase in our definite-lived intangible assets resulting from our acquisitions of GLI and Radiant in October 2020 and November 2021, respectively.

The $5.6 million, or 24.9% increase in amortization was driven by the increase in definite-lived intangible assets resulting from our acquisition of Radiant in November 2021.

Interest Expense

Interest expense was $15.8 million for the year ended December 31, 2022, compared to $24.4 million for the year ended December 31, 2021.

The $6.1 million, or 33.9% increase in interest expense was primarily due to an increase in the average outstanding balance of long-term debt and amortization from increased deferred financing fees and discount from entering into an amendment to the Term Loan, compared to the year ended December 31, 2020.

Other (Income) Expense, Net

Other (income) expense, net was ($4.9) million for the year ended December 31, 2021, compared to ($1.1) million for the year ended December 31, 2020.

The ($3.8) million increase in other (income) expense, net was primarily due to a $4.8 million gain related to the partial sale of our equity method investment, partially offset by a $1.0 million unfavorable change in net foreign currency transaction gains and losses associated with our international subsidiaries.

The $8.6 million, or 35.5% decrease in interest expense was primarily the result of lower amortization of deferred financing costs and debt discount and a lower average interest rate from the February 2022 debt refinancing, compared to the year ended December 31, 2021.

In addition, interest expense for the year ended December 31, 2022 was partially offset by an unrealized gain of $3.0 million related to the change in fair value of our interest rate swap.

Other Expense (Income), Net

Other expense (income), net was $1.3 million for the year ended December 31, 2022, compared to ($4.9) million for the year ended December 31, 2021.

The $6.2 million increase in other expense (income), net was primarily driven by a non-recurring $4.8 million gain related to the partial sale of our equity method investment during the year ended December 31, 2021 and a $1.3 million unfavorable change in net foreign currency transaction gains and losses associated with our international subsidiaries.

Earnings from Equity Method Investments

Earnings from equity method investment of Premier Pools & Spa was $2.2 million for the year ended December 31, 2021, compared to no equity in net earnings of Premier Pools & Spa for the year ended December 31, 2020 as the equity method investment was made in October 2020 and we record our proportionate share of earnings or losses in Premier Pools & Spa on a three-month lag.

Earnings from equity method investment of Premier Pools & Spa was $4.2 million for the year ended December 31, 2022, compared to $2.2 million for the year ended December 31, 2021, primarily because of the financial performance of Premier Pools & Spa, partially offset by our reduced ownership interest during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Income Tax Expense

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Our effective tax rate was 141.5% for the year ended December 31, 2022, compared to (16.5)% for the year ended December 31, 2021.

For the year ended December 31, 2021, the effective tax rate differed from the statutory tax rate primarily due to non deductible stock compensation of $25.7 million, partially offset by $12.7 million benefit related to the release of the valuation allowance on Canadian deferred tax assets.

For the year ended December 31, 2020, the effective tax rate was higher than the statutory tax rate primarily due to various non deductible expenses.

Net (Loss) Income

Net loss was $62.3 million for the year ended December 31, 2021, compared to $16.0 million of net income for the year ended December 31, 2020.

The $78.3 million, or 490.1% increase in net loss was primarily due to the factors described above.

Net (Loss) Income Margin

Net loss margin was 9.9% for the year ended December 31, 2021, compared to net income margin of 4.0% for the year ended December 31, 2020.

The 13.9% increase in net loss margin was due to a $78.3 million increase in net loss and a $227.1 million increase in net sales, compared to the year ended December 31, 2020 due to the factors described above.

The income tax expense of $19.4 million for the year ended December 31, 2022 was primarily because of a $9.2 million expense related to non-deductible stock compensation.

For the year ended December 31, 2021, the effective tax rate differed from the statutory tax rate primarily because of nondeductible stock compensation of $25.7 million, partially offset by $12.7 million benefit related to the release of the valuation allowance on Canadian deferred tax assets.

Net loss was $5.7 million for the year ended December 31, 2022, compared to $62.3 million of net loss for the year ended December 31, 2021.

The $56.6 million, or 90.9% decrease in net loss was primarily driven by the factors described above.

Net Loss Margin

Net loss margin was 0.8% for the year ended December 31, 2022, compared to net loss margin of 9.9% for the year ended December 31, 2021.

The 9.1% decrease in net loss margin was driven by a $56.6 million decrease in net loss and a $65.2 million increase in net sales, compared to the year ended December 31, 2021 because of the factors described above.

Adjusted EBITDA

Adjusted EBITDA was $143.3 million for the year ended December 31, 2022, compared to $139.8 million for the year ended December 31, 2021.

The $56.0 million, or 66.8% increase in Adjusted EBITDA was primarily due to the increase in net sales.

The $3.5 million, or 2.5% increase in Adjusted EBITDA was primarily because of the increase in net sales.

Adjusted EBITDA Margin

Adjusted EBITDA margin was 20.6% for the year ended December 31, 2022, compared to 22.2% for the year ended December 31, 2021.

The 1.4% increase in Adjusted EBITDA margin was primarily due to a $56.0 million increase in Adjusted EBITDA and an $227.1 million increase in net sales, compared to the year ended December 31, 2020.

The 1.6% decrease in Adjusted EBITDA margin was primarily because of a $3.5 million increase in Adjusted EBITDA and an $65.2 million increase in net sales, compared to the year ended December 31, 2021, driven by the factors detailed above.

Year ended December 31, 2021 Compared to Year ended December 31, 2020

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Selling, general, and administrative expense

Income from operations

(Loss) income from operations

Other expense (income):

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Total other expense (income), net

Income before income taxes

Income tax expense (benefit)

Earnings from equity method investment

(Loss) income before income taxes

Income tax expense

Net (loss) income

Adjusted EBITDA

For discussion on comparison of the fiscal years ended December 31, 2020 and 2019, see the Results of Operations section disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Prospectus, which was filed with the SEC on January 7, 2022.

For discussion on comparison of the fiscal years ended December 31, 2021 and 2020, see the Results of Operations section disclosed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which was filed with the SEC on March 10, 2022.

Non-GAAP Financial Measures

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Other companies may calculate similarly-titled non-GAAP measures differently, limiting their usefulness as comparative measures.

To address these limitations, we have reconciled Adjusted EBITDA to the applicable most comparable GAAP measure, net income, throughout this Annual Report.

To address these limitations, we have reconciled Adjusted EBITDA to the applicable most comparable GAAP measure, net income (loss), throughout this Annual Report.

Adjusted EBITDA and Adjusted EBITDA Margin

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Adjusted EBITDA and Adjusted EBITDA margin are also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures.

We use Adjusted EBITDA and Adjusted EBITDA margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other companies using similar measures.

We have presented Adjusted EBITDA and Adjusted EBITDA margin solely as supplemental disclosures because we believe they allow for a more complete analysis of results of operations and assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, such as (i) depreciation and amortization, (ii) interest expense, (iii) income tax (benefit) expense, (iv) loss on sale and disposal of property and equipment, (v) restructuring charges, (vi) management fees, (vii) stock-based compensation expense, (viii) unrealized (gains) losses on foreign currency transactions, (ix) strategic initiative costs, (x) acquisition and integration related costs, (xi) other and (xii) IPO costs.

We use Adjusted EBITDA and Adjusted EBITDA margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to utilize as a significant performance metric in our annual management incentive bonus plan compensation, and to compare our performance against that of other companies using similar measures.

We have presented Adjusted EBITDA and Adjusted EBITDA margin solely as supplemental disclosures because we believe they allow for a more complete analysis of results of operations and assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, such as (i) depreciation and amortization, (ii) interest expense, (iii) income tax (benefit) expense, (iv) loss (gain) on sale and disposal of property and equipment, (v) restructuring charges, (vi) stock-based compensation expense, (vii) unrealized (gains) losses on foreign currency transactions, (viii) strategic initiative costs, (ix) acquisition and integration related costs, (x) loss on extinguishment of debt, (xi) underwriting fees related to offering of common stock, (xii) the Odessa fire and other such unusual events, (xiii) IPO costs and (xiv) other.

Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and should not be considered as alternatives to net income as a measure of financial performance or any other performance measure derived in accordance with GAAP, and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

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● do not reflect income tax (benefit) expense, and because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and ability to operate;

● do not reflect non-cash equity compensation, which will remain a key element of our overall equity-based compensation package;

● do not reflect non-cash stock-based compensation, which will remain a key element of our overall compensation package;

● do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations.

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Management compensates for these limitations by primarily relying on our GAAP results, while using Adjusted EBITDA and Adjusted EBITDA margin as supplements to the corresponding GAAP financial measures.

The following table provides a reconciliation of our net income to Adjusted EBITDA for the periods presented and the calculation of Adjusted EBITDA margin:

The following table provides a reconciliation of our net income (loss) to Adjusted EBITDA for the periods presented and the calculation of Adjusted EBITDA margin:

Year Ended December 31,

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Interest expense

Income tax expense (benefit)

Income tax expense

Loss on sale and disposal of property and equipment

Restructuring charges (a)

Management fees (b)

Stock-based compensation expense

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

Strategic initiative costs (d)

Acquisition and integration related costs (e)

IPO costs (g)

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

Strategic initiative costs (c)

Acquisition and integration related costs (d)

Loss on extinguishment of debt (e)

Underwriting fees related to offering of common stock (f)

Odessa fire (g)

IPO costs (h)

Adjusted EBITDA

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Adjusted EBITDA margin

(a) Represents the cost of shutting down production and warehouse facilities in Decatur, Georgia and Mississauga, Ontario, Canada, including the cost to transfer and dispose of property and equipment and involuntary workforce reductions.

(a) Represents costs related to a cost reduction plan announced in 2022 to optimize production and shift schedules, implement a workforce reduction, and to shut down our Bossier City, Louisiana facility.

Also includes severance and other costs for our executive management changes.

(b) Represents management fees paid to our Principal Stockholders in accordance with our arrangement, which terminated as of the effective date of our initial public offering.

(c) Represents foreign currency transaction (gains) and losses associated with our international subsidiaries and changes in the fair value of the contingent consideration recorded in connection with the acquisition of Narellan, which was settled in September 2020.

(d) Represents fees paid to external consultants for our strategic initiatives, including our rebranding initiative.

(e) Represents acquisition and integration costs primarily related to the acquisitions of Narellan, GLI and Radiant, the equity investment in Premier Pools & Spas, as well as other costs related to potential transactions.

(f) Other costs consist of other discrete items as determined by management, primarily including:

(i) fees paid to external advisors for various matters, (ii) the cost incurred and insurance proceeds related to our production facility fire in Picton, Australia in 2020, (iii) non-cash adjustments to record the step-up in the fair value of inventory related to the acquisition by Pamplona and the acquisitions of Narellan, GLI and Radiant, which are amortized through cost of sales in the annual consolidated statements of operations, (iv) gain on sale of portion of equity method investment, and (v) other items.

(g) 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.

(b) Represents foreign currency transaction (gains) and losses associated with our international subsidiaries and changes in the fair value of the contingent consideration recorded in connection with the acquisition of Narellan, which was settled in September 2020.

(c) Represents expenses for our strategic initiatives, including our rebranding initiative and fees paid to external consultants.

(d) Represents acquisition and integration costs primarily related to the acquisitions of GLI and Radiant, the equity investment in Premier Pools & Spas, as well as other costs related to potential transactions.

(e) Represents the loss on extinguishment of debt in connection with our debt refinancing on February 23, 2022.

(f) Represents underwriting fees related to our offering of common stock that was completed in January 2022.

(g) Represents costs incurred and insurance recoveries related to a production facility fire in Odessa, Texas.

(h) These expenses are primarily composed of legal, accounting, and professional fees incurred in connection with our initial public offering that are not capitalizable, and that are included within selling, general, and administrative expense.

(i) Other costs consist of other discrete items as determined by management, primarily including:

(i) fees paid to external advisors for various matters, (ii) the cost incurred and insurance proceeds related to our production facility fire in Picton, Australia in 2020, (iii) non-cash adjustments to record the step-up in the fair value of inventory related to the acquisitions of GLI and Radiant, which were amortized through cost of sales in the consolidated statements of operations, (iv) gain on sale of portion of equity method investment, and (v) other items.

Liquidity and Capital Resources

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

Historically, we have funded working capital requirements, capital expenditures, payments related to acquisitions, and debt service requirements with internally generated cash on hand and through our Amended Term Loan and Revolving Credit Facility (each as defined below under “— Our Indebtedness”) and through the issuance of shares of our common stock.

Our primary cash needs are to fund working capital, capital expenditures, debt service requirements and any acquisitions we may undertake.

As of December 31, 2021, we had $44.0 million of cash, $280.4 million of outstanding borrowings and an additional $30.0 million of availability under our Revolving Credit Facility.

Historically, we have funded working capital requirements, capital expenditures, payments related to acquisitions, and debt service requirements with internally generated cash on hand, through borrowings under our credit facilities, and through the issuance of shares of our common stock.

Our primary cash needs are to fund working capital, capital expenditures, debt service requirements, and any acquisitions or investments we may undertake.

As of December 31, 2022, we had $32.6 million of cash, $312.9 million of outstanding borrowings, and an additional $75.0 million of availability under our New Revolving Credit Facility.

Our primary working capital requirements are for the purchase of inventory, payroll, rent, facility costs and other selling, general, and administrative costs.

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We expect to fund these capital expenditures from net cash provided by operating activities.

We believe our existing cash, cash generated from operations and availability under our New Revolving Credit Facility, will be adequate to fund our operating expenses and capital expenditure requirements over the next 12 months.

We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

We may issue debt or equity securities, which may provide an additional source of liquidity.

However, there can be no assurance equity or debt financing will be available to us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders.

Our Indebtedness

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(“Latham Pool Products”), our wholly owned subsidiary, entered into the New Credit Agreement with Barclays Bank PLC, which provides a senior secured multicurrency revolving line of credit (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.

On the closing date, proceeds under the agreement were used to repay and replace $294.0 million under, and terminate, the Credit Agreement and for general corporate purposes.

Dollar senior secured term loan (the “New Term Loan”) in an initial principal amount of $325.0 million.

On the closing date, proceeds under the agreement were used to repay and replace $294.0 million under, and terminate, the Credit Agreement (as defined below) and for general corporate purposes.

New Revolving Credit Facility

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The New Revolving Credit Facility is not subject to amortization.

New Term Loan Facility

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 (as defined in the New Credit Agreement, the “First Lien Net Leverage Ratio”), or based on the Base Rate (as defined in the New Credit Agreement), plus a margin ranging from 2.75% to 3.00%, depending on the First Lien Net Leverage Ratio.

Loans under the New Term Loan Facility are subject to scheduled quarterly amortization payments equal to 0.25% of the initial principal amount of the New Term Loan Facility.

Revolving Credit Facility

On December 18, 2018, Latham Pool Products entered into an agreement (the “Credit Agreement”) with Nomura Corporate Funding Americas, LLC (“Nomura”) that included a revolving line of credit (the “Revolver”) and letters of credit (“Letters of Credit” or collectively with the Revolver, the “Revolving Credit Facility”), as well as a Term Loan (as described and defined below).

The Revolving Credit Facility was utilized to finance ongoing general corporate and working capital needs with the Revolver of up to $30.0 million.

The Revolving Credit Facility was terminated in connection with the debt refinancing on February 23, 2022.

Term Loan Facility

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

The Term Loan was amended on May 29, 2019, to provide additional borrowings of $23.0 million, which was accounted for as a modification to the Term Loan, to fund our acquisition of Narellan (the “First Amendment”).

New Term Loan

The New Term Loan matures on February 23, 2029.

Loans outstanding under the New Term Loan bear interest, at the borrower’s option, at a rate per annum based on Term SOFR (as defined in the New Credit Agreement), plus a margin ranging from 3.75% to 4.00%, depending on the First Lien Net Leverage Ratio (as defined in the New Credit Agreement, the “First Lien Net Leverage Ratio”), or based on the Base Rate (as defined in the New Credit Agreement), plus a margin ranging from 2.75% to 3.00%, depending on the First Lien Net Leverage Ratio.

Loans under the New Term Loan are subject to scheduled quarterly amortization payments equal to 0.25% of the initial principal amount of the New Term Loan.

Prior Revolving Credit Facility

On December 18, 2018, Latham Pool Products entered into an agreement (the “Credit Agreement”) with Nomura Corporate Funding Americas, LLC (“Nomura”) that included a revolving line of credit (the “Revolver”) and letters of credit (“Letters of Credit” or collectively with the Revolver, the “Prior Revolving Credit Facility”), as well as the Prior Term Loan (as described and defined below).

The Prior Revolving Credit Facility was utilized to finance ongoing general corporate and working capital needs with the Revolver of up to $30.0 million.

The Prior Revolving Credit Facility was terminated in connection with the debt refinancing on February 23, 2022.

Prior Term Loan

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

The Prior 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 Prior Term Loan, to fund our acquisition of Narellan (the “First Amendment”).

On October 14, 2020, we amended the First Amendment to provide additional borrowings of $20.0 million, which was accounted for as new debt (the “Second Amendment”).

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On March 31, 2021, we amended our Term Loan to revise the applicable reporting requirements (the “Fourth Amendment”).

On November 24, 2021, we amended the Term Loan to provide additional borrowings of $50 million (the “Fifth Amendment”).

On November 24, 2021, we amended the Prior 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.”

As of December 31, 2021, we were in compliance with all covenants under the Revolving Credit Facility and the Amended Term Loan.

The Amended Term Loan was terminated in connection with the debt refinancing on February 23, 2022.

The Prior Term Loan, collectively with the First Amendment, Second Amendment, Third Amendment, the Fourth Amendment, and the Fifth Amendment, is referred to as the “Amended Prior Term Loan.” As of December 31, 2021, we were in compliance with all covenants under the Prior Revolving Credit Facility and the Amended Prior Term Loan.

The Amended Prior Term Loan was terminated in connection with the debt refinancing on February 23, 2022.

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

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During the year ended December 31, 2022, operating activities provided $32.3 million of cash.

Net income, after adjustments for non-cash items, provided cash of $88.5 million.

Net income (loss), after adjustments for non-cash items, provided cash of $105.9 million.

Cash provided by operating activities was further driven by changes in our operating assets and liabilities, which used $73.6 million.

Net cash used in changes in our operating assets and liabilities for the year ended December 31, 2021 consisted primarily of a $26.0 million increase in trade receivables, a $39.7 million increase in inventories, a $4.5 million increase in prepaid expenses and other current assets and a $1.2 million decrease in other long-term liabilities, partially offset by a $10.7 million increase in accounts payable, a $4.7 million increase in accrued expenses and other current liabilities, a $0.8 million decrease in other assets and a $0.3 million decrease in income tax receivable.

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.

Net cash used in changes in our operating assets and liabilities for the year ended December 31, 2022 consisted primarily of a $57.0 million increase in inventories, a $0.5 million increase in other assets, a $19.4 million decrease in accrued expenses and other current liabilities, and a $12.4 million decrease in accounts payable, partially offset by a $9.0 million decrease in trade receivables, a $4.7 million decrease in prepaid expenses and other current assets, a $1.7 million decrease in income tax receivable, and a $0.2 million increase in other long-term liabilities.

The change in trade receivables was primarily driven by the timing of net sales, and the increase in inventories was primarily driven by a business decision to carry more inventory, as well as higher costs.

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

During the year ended December 31, 2021, operating activities provided $33.7 million of cash.

Net income, after adjustments for non-cash items, provided cash of $42.1 million.

Cash provided by operating activities was further driven by changes in our operating assets and liabilities which provided $21.1 million.

Net cash provided by changes in our operating assets and liabilities for the year ended December 31, 2020 consisted primarily of an $20.6 million increase in accrued expenses and other current liabilities, a $9.8 million increase in accounts payable and a $9.5 million decrease in trade receivables, partially offset by a $17.0 million increase in inventories and a $4.2 million increase in income tax receivable.

The changes in accrued expenses and other current liabilities and accounts payable were primarily due to the increase and timing of payments for rebate accruals, the increase in accrued incentives related to the management incentive bonus plan and GLI acquisition-related fees.

The change in trade receivables was driven by the timing of inventory shipments.

The increase in inventories was primarily due to increased production in response to customer demand.

The increase in income tax receivable was due to estimated tax payments made in in excess of the actual annual tax provision.

Net income (loss), after adjustments for non-cash items, provided cash of $88.5 million.

Cash provided by operating activities was further driven by changes in our operating assets and liabilities, which used $54.8 million.

Net cash used in changes in our operating assets and liabilities for the year ended December 31, 2021 consisted primarily of a $26.0 million increase in trade receivables, a $39.7 million increase in inventories, a $4.5 million increase in prepaid expenses and other current assets, and a $1.2 million decrease in other long-term liabilities, partially offset by a $10.7 million increase in accounts payable, a $4.7 million increase in accrued expenses and other current liabilities, a $0.8 million decrease in other assets, and a $0.3 million decrease in income tax receivable.

The change in trade receivables was primarily driven by the timing of and increase in net sales, and the increase in inventories was primarily driven by increased production and cost inflation.

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

Investing Activities

During the year ended December 31, 2022, investing activities used $45.0 million of cash, primarily consisting of the purchase of property and equipment for $39.7 million and acquisitions of businesses of $5.4 million.

The purchase of property and equipment was primarily to expand capacity for production, especially for fiberglass pools.

During the year ended December 31, 2021, investing activities used $108.2 million of cash, primarily consisting of the acquisition of Radiant of $90.5 million, and the purchase of property and equipment for $25.0 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 to expand capacity for inventory production in order to meet increasing customer demand.

During the year ended December 31, 2020, investing activities used $115.8 million of cash, consisting of the acquisition of GLI of $74.7 million, the equity investment in Premier Pools & Spas of $25.4 million and the purchase of property and equipment for $16.3 million, partially offset by proceeds from the sale of property and equipment of $0.6 million.

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

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 year ended December 31, 2021, financing activities provided $60.0 million of cash, primarily consisting of proceeds from our IPO, net of underwriting discounts, commissions and offering costs of $399.3 million, proceeds from borrowings on the Amended Term Loan of $222.8 million and borrowings on the Revolving Credit Facility of $16.0 million, partially offset by the repurchase of treasury stock of $281.6 million, payments on long-term debt borrowings of $169.1 million, dividends to Class A unitholders of $110.0 million, and payments on Revolving Credit Facility borrowings of $16.0 million.

During the year ended December 31, 2020, financing activities provided $54.3 million of cash, primarily consisting of proceeds from the issuance of common stock of $65.6 million and proceeds from long-term debt borrowings of $20.0 million, partially offset by payments on long-term debt borrowings of $24.0 million and payments to settle the Narellan contingent consideration of $6.6 million.

For discussion on operating, investing, and financing activities of the fiscal year ended December 31, 2019, see the Liquidity and Capital Resources section disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Prospectus, which was filed with the SEC on January 7, 2022.

During the year ended December 31, 2022, financing activities provided $3.8 million of cash, primarily consisting of proceeds from long-term debt borrowings in connection with the debt 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 $286.5 million, the repurchase and retirement of common stock of $280.7 million, repayments on revolving credit facility borrowings of $25.0 million, and deferred financing fees paid of $6.9 million.

During the year ended December 31, 2021, financing activities provided $60.0 million of cash, primarily consisting of proceeds from our IPO, net of underwriting discounts, commissions, and offering costs of $399.3 million, proceeds from borrowings on the Amended Prior Term Loan of $222.8 million and borrowings on the Prior Revolving Credit Facility of $16.0 million, partially offset by the repurchase of common stock of $281.6 million, payments on long-term debt borrowings of $169.1 million, dividends to Class A unitholders of $110.0 million, and payments on Revolving Credit Facility borrowings of $16.0 million.

For discussion on operating, investing, and financing activities of the fiscal year ended December 31, 2020, see the Liquidity and Capital Resources section disclosed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which was filed with the SEC on March 10, 2022.

We experience inflation and deflation related to our purchase of certain products.

This price volatility could potentially have a material impact on our financial condition and/or our results of operations.

In order to mitigate price volatility, we monitor price fluctuations and may adjust our selling prices accordingly, however, our ability to recover higher costs through increased pricing may be limited by the competitive environment in which we operate.

Contractual Obligations

Our largest contractual obligations as of December 31, 2021 consisted of principal payments related to our long-term indebtedness that are included in our consolidated balance sheet and the related periodic interest payments, and non-cancelable capital and operating leases.

For a description of our contractual obligations and commitments, see Notes 7 “Long-Term Debt” and 14 “Commitments and Contingencies” to our Consolidated Financial Statements included elsewhere in this Annual Report.

Long-term indebtedness and interest on long-term indebtedness changed materially due to the termination of the Credit Agreement and its replacement with the New Credit Agreement described in “—Our Indebtedness” above since December 31, 2021.

As a result, the required principal payments would be $2.4 million in 2022, $3.3 million in 2023, $3.3 million in 2024, $3.3 million in 2025, $3.3 million in 2026, and $309.6 million thereafter.

At the new assumed interest rate of 4.37% as of February 23, 2022, required interest payments would be $11.8 million in 2022, $14.0 million in 2023, $13.9 million in 2024, $13.8 million in 2025, $13.6 million in 2026, and $29.0 million thereafter.

Our largest contractual obligations as of December 31, 2022 consisted of principal payments related to our long-term indebtedness that are included in our consolidated balance sheet and the related periodic interest payments, and non-cancelable operating leases.

For a description of our contractual obligations and commitments, see Notes 9 “Long-Term Debt” and 13 “Leases” to our Consolidated Financial Statements included elsewhere in this Annual Report.

Critical Accounting Policies and Estimates

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Revenue Recognition

We adopted ASC 606 on January 1, 2019, using the modified retrospective method.

This standard applies to all contracts with customers, except for contracts that are within the scope of other standards.

The adoption of ASC 606 resulted in a net decrease to retained earnings (accumulated deficit) of $1.7 million, a reduction to prepaid expenses of $1.2 million and an increase to accrued expenses of $0.5 million as of January 1, 2019, as a result of adjusting the timing of recording customer incentives to more closely match the revenues to which they are associated.

With the exception of our extended service warranties and our custom product contracts, we recognize our revenue at a point in time when control of the promised goods is transferred to our customers, and in an amount that reflects the consideration we expect to be entitled to in exchange for those goods.

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We recognize revenue on the transaction price less any estimated rebates, returns, allowances, cash discounts, or other sales incentives.

Customer rebates, returns, allowances, cash discounts, and other sales incentives are estimated by applying the portfolio approach using the most-likely-amount method and are recorded as a reduction to revenue at the time of the initial sale.

Customer Rebates and Cash Discounts

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We have selected the first day of the fourth fiscal quarter to perform our annual goodwill impairment testing.

Historically, including for our annual impairment test conducted during the year ended December 31, 2020, we had two reporting units for the purpose of performing our goodwill impairment test.

In November 2020, we made changes to our internal organizational structure, including roles and responsibilities and to our internal reporting, resulting in a change to segment management.

As a result of the change in segment management and in the information that is regularly reviewed, the results of the previous two reporting units are no longer being reviewed for profitability on an individual basis.

Due to these factors, we recognized a change in our reporting units effective in November 2020 and determined that only one reporting unit exists.

We completed an assessment of any potential impairment for all reporting units immediately prior to and after the reporting unit change and determined that no impairment existed.

We may assess our goodwill for impairment initially using a qualitative approach, or step zero, to determine whether conditions exist to indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value.

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If the carrying amount of the reporting unit exceeds its fair value, there is an impairment of goodwill and an impairment loss is recorded.

We calculate the impairment loss by comparing the fair value of the reporting unit less the carrying value, including goodwill.

We calculate the

impairment loss by comparing the fair value of the reporting unit less the carrying value, including goodwill.

The goodwill impairment is limited to the carrying value of the goodwill.

Based on the results of the qualitative assessment performed for our one reporting unit, we determined that goodwill was not impaired at October 3, 2021.

Based on the results of our quantitative impairment test performed for our two reporting units at September 27, 2020, we determined that goodwill was not impaired at September 27, 2020.

For our quantitative impairment test performed for our reporting units at September 27, 2020, we estimated the fair value of our reporting unit based on the weighting of the enterprise value derived using an income approach and a market approach.

We applied a weighting of 75% to the income approach and a weighting of 25% to the market approach.

Under the income approach, fair value is estimated using a discounted cash flow (the “DCF”) analysis.

The DCF analysis involved applying appropriate discount rates to estimated future cash flows based on forecasts of sales, costs and capital requirements.

Significant estimates in the DCF method included the weighted average cost of capital, growth and profitability expectations for the business, and working capital effects.

The weighted average cost of capital accounts for the time value of money and the appropriate degree of risks inherent in our business.

We estimated future sales growth using a number of factors, including among others, our nature and our history, financial and economic conditions affecting us, our industry and the general company, past results and our current operations and future prospects.

Forecasts of future operations are based, in part, on operating results and our expectations as to future market conditions.

We deemed the discount rate used in our analysis to be commensurate with the underlying uncertainties associated with achieving the estimated cash flows we project.

This analysis contained uncertainties because it required us to make assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies.

Under the market approach, fair value is estimated using the merger and acquisition (“M&A”) method.

The M&A method indicates our enterprise value by looking at historical prices from our completed M&A transactions and those from comparable companies to get a range of multiples.

Significant estimates in the M&A method included identifying appropriate market multiples and assessing earnings before interest, income taxes, depreciation and amortization, or EBITDA, in estimating the fair value of the reporting unit.

Based on the results of the qualitative assessments performed for our one reporting unit, we determined that goodwill was not impaired at October 2, 2022 or October 3, 2021.

However, if factors exist that could indicate an impairment in the future, including a sustained decrease in our stock price, we may be required to record impairment charges in future periods.

The qualitative factors we assessed included economic conditions, industry and market considerations, cost factors, overall financial performance, and other entity specific events.

In addition, we considered our market capitalization based on quoted market prices of our securities on the Nasdaq Global Select Market, adjusted for the effect of a control premium as contemplated by ASC 350.

Stock-Based Compensation

Stock-based compensation is measured and recognized based on the grant date fair value of the awards.

The fair value of our common stock is determined based on the quoted market price of our common stock for purposes of computing stock compensation expense.

The fair value of our common stock is determined based on the quoted market price of our common stock for purposes of computing stock-based compensation expense.

For stock options, we use a Black-Scholes model for estimating the grant date fair value.

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The expected term is computed using the simplified method.

We use the simplified method to calculate expected term of the stock options as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

We use the simplified method to calculate expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

The risk-free interest rate is based on the yield available on U.S.

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These assumptions require a significant amount of judgment, including estimates of future taxable income.

As of December 31, 2021 and 2020, our valuation allowance was $0.0 million and $12.7 million, respectively.

As of both December 31, 2022 and 2021, our valuation allowance was $0.0 million.

We continue to assess whether any significant changes in circumstances or assumptions have occurred that could materially affect our ability to realize deferred tax assets.

We released the valuation allowance in 2021 since we believe we have sufficient positive evidence, including, but not limited to, three years’ of cumulative pre-tax book income including permanent adjustments and recent profits within taxing jurisdictions to overcome any negative evidence related to loss utilization expiration periods.

We released the valuation allowance in 2021 since we believe we have sufficient positive evidence, including, but not limited to, three years’ of cumulative pre-tax book

income, including permanent adjustments and recent profits within taxing jurisdictions, to overcome any negative evidence related to loss utilization expiration periods.

We record liabilities for uncertain income tax positions based on a two-step process.

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Changes in recognition and measurement estimates are recorded in income tax (benefit) expense and liability in the period in which such changes occur.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Emerging Growth Company Status

The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies.

We have elected not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company.

We may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies.

Recently Issued and Adopted Accounting Pronouncements

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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-K

Item 7. Management’s Discussion and Analysis