What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2022-11-10 · 172 added, 266 removed, 125 unchanged (78% of the section changed)

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Cautionary Note Regarding Forward-Looking Statements

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

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

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

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

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

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

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

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

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

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

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

the impact of weather on our business;

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

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

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;

inability to achieve projected savings from our cost reduction initiatives;

and other risks, uncertainties and factors set forth in this Quarterly Report on Form 10-Q, including those set forth under section titled “Risk Factors.” These forward-looking statements reflect our views with respect to future events as of the date of this Quarterly Report on Form 10-Q and are based on assumptions and subject to risks and uncertainties.

Certain statements in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All statements contained in this report other than statements of historical fact may constitute forward-looking statements, including statements regarding our future operating results and financial position, our business strategy and plans, business and market trends, our objectives for future operations, macroeconomic and geopolitical conditions, and the sufficiency of our cash balances, working capital and cash generated from operating, investing, and financing activities for our future liquidity and capital resource needs.

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

These statements involve known and unknown risks, uncertainties, assumptions 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, including those set forth under “Risk Factors,” “Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in the Annual Report, elsewhere in this Quarterly Report on Form 10-Q, and as described in other subsequent reports we file or furnish with the SEC.

For similar reasons, our past results may not be a reliable indicator of future performance and trends.

We encourage you to read this report and our other filings with the SEC carefully.

You also should be aware that these risk factors and other information may not described every risk that we face.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may affect us.

We operate in a very competitive and rapidly changing environment, and new risks emerge from time to time.

Although we believe that the expectations reflected in the forward-looking statements are reasonable and our expectations based on third-party information and projections are from sources that management believes to be reputable, we cannot guarantee future results, levels of activities, performance, or achievements.

These forward-looking statements reflect our views with respect to future events as of the date of this Quarterly Report on Form 10-Q or the date specified herein, and we have based these forward-looking statements on our current expectations and projections about future events and trends.

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

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

Except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report on Form 10-Q.

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

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

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

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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.

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

We support our dealer network with business development tools, co-branded marketing programs, and in-house training.

Our operations consist 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 to position ourselves as a value-added partner to our dealers.

We conduct our business as one operating and reportable segment that designs, manufactures, and markets in-ground swimming pools, liners, and covers.

Recent Developments

Highlights for the fiscal quarter ended October 1, 2022

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

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

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

Highlights for the three fiscal quarters ended October 1, 2022

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

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

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

Highlights for the fiscal quarter ended April 1, 2023

● Decrease in net sales of 28.1%, or $53.9 million, to $137.7 million for the fiscal quarter ended April 1, 2023, compared to $191.6 million for the fiscal quarter ended April 2, 2022.

● Increase in net loss of $11.6 million, to $14.4 million for the fiscal quarter ended April 1, 2023, compared to a net loss of $2.8 million for the fiscal quarter ended April 2, 2022, representing a 10.4% net loss margin for the fiscal quarter ended April 1, 2023.

● Decrease in Adjusted EBITDA (as defined below) of $37.0 million, to $11.0 million for the fiscal quarter ended April 1, 2023, compared to $48.0 million for the fiscal quarter ended April 2, 2022.

Business Update

Market conditions continue to evolve.

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

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

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

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

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

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

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

Macroeconomic challenges are affecting consumer spending and softening demand, resulting in anticipated declines in U.S.

new in-ground pool installations.

We continue to see a normalization of packaged pool channel inventory in the wholesale distribution channel from elevated levels, which is expected to remain a headwind through at least the first half of fiscal 2023.

We believe continued progress on fiberglass conversion efforts, especially from concrete, will be a tailwind as we continue to work to drive homeowner and dealer awareness and adoption, supported by our continued momentum on our lead generation efforts and digital tools.

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.

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 pool cover and pool liner manufacturing footprint with the closure of our Bossier City, Louisiana facility in the first fiscal quarter of 2023.

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

Inflation Reduction Act

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

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

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

Key Performance Indicators

We derive our revenue from the design, manufacture and sale of in-ground swimming pools, pool covers and liners.

We sell fiberglass pools, which are one-piece manufactured fiberglass pools that are ready to be installed in a consumer’s backyard and custom vinyl pools, which are manufactured pools that are made out of non-corrosive steel or composite polymer frame, on top of which a vinyl liner is installed.

We derive our revenue from the design, manufacture, and sale of in-ground swimming pools, pool covers, and pool liners.

We sell fiberglass pools, which are one-piece manufactured fiberglass pools that are ready to be installed in a consumer’s backyard, and custom vinyl pools, which are manufactured pools that are made out of non-corrosive steel, aluminum, or composite polymer frame, on top of which a vinyl liner is installed.

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

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

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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With the exception of our extended service warranties and our custom product contracts, we recognize our revenue when control of our promised goods is transferred to our customers, either upon shipment or arrival at our customer’s destination depending upon the terms of the purchase order.

Sales are recognized net of any estimated rebates, cash discounts or other sales incentives.

Sales are recognized net of any estimated rebates, returns, allowances, cash discounts, or other sales incentives.

Revenue that is derived from our extended service warranties, which are separately priced and sold, is recognized over the term of the contracts.

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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) stock-based compensation expense, (vii) unrealized (gains) losses on foreign currency transactions, (viii) strategic initiative costs, (ix) acquisition and integration related costs, (x) loss on extinguishment of debt, (xi) other, (xii) underwriting fees related to offering of common stock, (xiii) Odessa fire and (xiv) IPO costs.

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

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 losses (gains) 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) Odessa fire and (xiii) other items that we do not believe are indicative of our core operating performance.

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

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Our definitions of Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to similarly titled measures of other companies.

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

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

Results of Operations

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

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

Fiscal Quarter Ended April 1, 2023 Compared to Fiscal Quarter Ended April 2, 2022

The following table summarizes our results of operations for the fiscal quarter ended April 1, 2023 and April 2, 2022:

Fiscal Quarter Ended

October 1, 2022

October 2, 2021

(dollars in thousands)

Cost of sales

Selling, general and administrative expense

Income (loss) from operations

Other expense (income):

Interest expense

Other expense (income), net

Total other expense, net

Earnings from equity method investment

Income (loss) before income taxes

Income tax expense

Net income (loss)

Adjusted EBITDA (a)

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

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

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

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

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

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

wholesale distribution channel.

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

Cost of Sales and Gross Margin

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

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

The $19.5 million, or 17.6%, increase in cost of sales was primarily the result of cost inflation, partially offset by a $1.2 million decrease in non-cash stock-based compensation expense.

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

Selling, General and Administrative Expense

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

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

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

The $1.7 million, or 30.4%, increase in amortization was due to the increase in our definite-lived intangible assets resulting from our acquisition of Trojan Leisure Products, LLC d/b/a Radiant Pools (“Radiant”) in November 2021.

Interest Expense

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

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

Other Expense (Income), Net

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

The $3.6 million increase in other expense was primarily due to a non-recurring $3.9 million gain related to the partial sale of our equity method investment for the fiscal quarter ended October 2, 2021 and a favorable change in net foreign currency transaction gains and losses associated with our international subsidiaries.

Earnings from Equity Method Investment

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

Income Tax Expense

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

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

The difference between the U.S.

federal statutory income tax rate and our effective income tax rate for both the fiscal quarters ended October 1, 2022 and October 2, 2021 was primarily attributable to the discrete impact of stock-based compensation expense for which there is no associated tax benefit.

Net Income (Loss)

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

The $23.2 million, or 205.1%, increase in net income was primarily due to the factors described above.

Net Income (Loss) Margin

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

The 13.3% increase in net income margin was due to a $23.2 million increase in net income and a $27.4 million increase in net sales, compared to the fiscal quarter ended October 2, 2021 due to the factors described above.

Adjusted EBITDA

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

The $6.2 million, or 17.0%, increase in Adjusted EBITDA was primarily due to the increase in net sales, as well as the other factors described above.

Adjusted EBITDA Margin

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

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

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

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

Three Fiscal Quarters Ended

October 1, 2022

October 2, 2021

April 1, 2023

April 2, 2022

(dollars in thousands)

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Underwriting fees related to offering of common stock

Income (loss) from operations

(Loss) income from operations

Other expense (income):

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Earnings from equity method investment

Income (loss) before income taxes

Income tax expense

Net income (loss)

(Loss) income before income taxes

Income tax (benefit) expense

Adjusted EBITDA (a)

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

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

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

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

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

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

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

Net sales were $137.7 million for the fiscal quarter ended April 1, 2023, compared to $191.6 million for fiscal quarter ended April 2, 2022.

The $53.9 million, or 28.1%, decrease in net sales was because of a $57.2 million decrease in volume, partially offset by a $3.3 million increase from pricing.

The decrease was primarily attributable to volume declines as the pool market returned to pre-2020 seasonality, the wholesale channel continued to destock packaged pool inventory, and macroeconomic challenges continued.

The decrease in total net sales of $53.9 million across our product lines consisted of $33.2 million for in-ground swimming pools and $20.9 million for liners, partially offset by a $0.2 million increase in covers.

Cost of Sales and Gross Margin

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

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

The $60.9 million, or 18.5%, increase in cost of sales was primarily the result of cost inflation, partially offset by a $3.8 million decrease in non-cash stock-based compensation expense.

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

Cost of sales was $104.3 million for the fiscal quarter ended April 1, 2023, compared to $121.0 million for the fiscal quarter ended April 2, 2022.

Gross margin decreased by 12.7%, to 24.2% of net sales for the fiscal quarter ended April 1, 2023 compared to 36.9% of net sales for the fiscal quarter ended April 2, 2022.

The $16.7 million, or 13.7%, decrease in cost of sales was primarily the result of the decrease in sales volume and a $0.8 million decrease in non-cash stock-based compensation expense.

The 12.7% decrease in gross margin was primarily driven by reduced sales, negative fixed cost leverage from volume declines, the impact of inflation, and the right sizing of our inventory, partially offset by lower non-cash stock-based compensation expense.

Selling, General, and Administrative Expense

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

The $56.7 million, or 33.3%, decrease in selling, general and administrative expense was primarily due to a $60.4 million decrease in non-cash stock-based compensation expense, partially offset by a $1.2 million increase in ongoing public company costs, and an increase in insurance and travel related expenses.

Selling, general, and administrative expense was $33.1 million for the fiscal quarter ended April 1, 2023, compared to $45.2 million for the fiscal quarter ended April 2, 2022, and increased as a percentage of net sales by 0.4%.

The $12.1 million, or 26.9%, decrease in selling, general, and administrative expense was primarily driven by a $9.4 million decrease in non-cash stock-based compensation expense and benefits from the cost reduction actions taken in the fourth quarter of fiscal 2022.

Underwriting Fees Related to Offering of Common Stock

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

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

The $4.9 million, or 29.9%, increase in amortization was due to the increase in our definite-lived intangible assets resulting from our acquisition of Radiant in November 2021.

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

Amortization was $6.6 million for the fiscal quarter ended April 1, 2023, compared to $7.2 million for the fiscal quarter ended April 2, 2022.

The $0.6 million, or 7.8%, decrease in amortization was driven by certain definite-lived intangible assets becoming fully amortized during the fiscal year ended December 31, 2022.

Interest Expense

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

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

In addition, interest expense for the three fiscal quarters ended October 1, 2022 was partially offset by an unrealized gain of $4.2 million related to the change in fair value of our interest rate swap.

Interest expense was $10.8 million for the fiscal quarter ended April 1, 2023, compared to $1.8 million for the fiscal quarter ended April 2, 2022.

The $9.0 million, or 512.1%, increase in interest expense was primarily the result of the change in the fair value of our interest rate swaps and a higher effective interest rate, compared to the fiscal quarter ended April 2, 2022.

Interest expense for the fiscal quarter ended April 1, 2023 was impacted by an unrealized loss of $4.9 million related to the change in fair value of our interest rate swaps compared to an unrealized gain of $2.8 million for the fiscal quarter ended April 2, 2022.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was $3.5 million for the three fiscal quarters ended October 1, 2022, compared to none for the three fiscal quarters ended October 2, 2021, as our debt refinancing was completed in February 2022.

Loss on extinguishment of debt was $3.5 million for the fiscal quarter ended April 2, 2022, related to our debt refinancing completed in February 2022.

Other Expense (Income), Net

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

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

million gain related to the partial sale of our equity method investment for the three fiscal quarters ended October 2, 2021 and an unfavorable change in net foreign currency transaction gains and losses associated with our international subsidiaries.

Other expense (income), net was $0.2 million for the fiscal quarter ended April 1, 2023, compared to ($0.4) million for the fiscal quarter ended April 2, 2022.

The $0.6 million increase in other expense was primarily driven by an unfavorable change in net foreign currency transaction gains and losses associated with our international subsidiaries.

Earnings from Equity Method Investment

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

Income Tax Expense

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

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

Earnings from our equity method investment in Premier Pools & Spa were less than $0.1 million for the fiscal quarter ended April 1, 2023, compared to $0.5 million for the fiscal quarter ended April 2, 2022, primarily because of the financial performance of Premier Pools & Spa.

Income Tax (Benefit) Expense

Income tax benefit was $2.9 million for the fiscal quarter ended April 1, 2023, compared to income tax expense of $5.3 million for the fiscal quarter ended April 2, 2022.

Our effective tax rate was 16.9% for the fiscal quarter ended April 1, 2023, compared to 215.1% for the fiscal quarter ended April 2, 2022.

The difference between the U.S.

federal statutory income tax rate and our effective income tax rate for both the three fiscal quarters ended October 1, 2022 and October 2, 2021 was primarily attributable to the discrete impact of stock-based compensation expense for which there is no associated tax benefit.

Net Income (Loss)

Net income was $13.3 million for the three fiscal quarters ended October 1, 2022, compared to $56.4 million of net loss for the three fiscal quarters ended October 2, 2021.

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

Net Income (Loss) Margin

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

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

federal statutory income tax rate and our effective income tax rate for both the fiscal quarters ended April 1, 2023 and April 2, 2022 was primarily attributable to the discrete impact of stock-based compensation expense for which there is no associated tax benefit.

Net loss was $14.4 million for the fiscal quarter ended April 1, 2023, compared to $2.8 million of net loss for the fiscal quarter ended April 2, 2022.

The $11.6 million, or 405.9%, increase in net loss was primarily because of the factors described above.

Net Loss Margin

Net loss margin was 10.4% for the fiscal quarter ended April 1, 2023, compared to net loss margin of 1.5% for the fiscal quarter ended April 2, 2022.

The 8.9% increase in net loss margin was driven by a $11.6 million increase in net loss and a $53.9 million decrease in net sales, compared to the fiscal quarter ended April 2, 2022 because of the factors described above.

Adjusted EBITDA

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

The $26.4 million, or 23.5%, increase in Adjusted EBITDA was primarily due to the increase in net sales, as well as the other factors described above.

Adjusted EBITDA was $11.0 million for the fiscal quarter ended April 1, 2023, compared to $48.0 million for the fiscal quarter ended April 2, 2022.

The $37.0 million, or 77.0%, decrease in Adjusted EBITDA was primarily because of the decrease in net sales, as well as the other factors described above.

Adjusted EBITDA Margin

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

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

Adjusted EBITDA margin was 8.0% for the fiscal quarter ended April 1, 2023, compared to 25.0% for the fiscal quarter ended April 2, 2022.

The 17.0% decrease in Adjusted EBITDA margin was primarily because of a $37.0 million decrease in Adjusted EBITDA and a $53.9 million decrease in net sales, compared to the fiscal quarter ended April 2, 2022, as well as the other factors described above.

Non-GAAP Financial Measures

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

We use Adjusted EBITDA and Adjusted EBITDA margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to compare our performance against that of other companies using similar measures, and as a performance measure in certain employee incentive programs.

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

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 losses (gains) 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) Odessa fire and (xiii) other items that we do not believe are indicative of our core operating performance.

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 loss to Adjusted EBITDA for the periods presented and the calculation of Adjusted EBITDA margin:

Fiscal Quarter Ended

Three Fiscal Quarters Ended

October 1, 2022

October 2, 2021

October 1, 2022

October 2, 2021

(dollars in thousands)

Net income (loss)

April 1, 2023

April 2, 2022

(in thousands)

Depreciation and amortization

Interest expense

Income tax expense

Income tax (benefit) expense

Loss on sale and disposal of property and equipment

Restructuring charges (a)

Stock-based compensation (b)

Unrealized losses on foreign currency transactions (c)

Stock-based compensation expense (b)

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

Strategic initiative costs (d)

1 unchanged sentence

Loss on extinguishment of debt (f)

Other, net (g)

Underwriting fees related to offering of common stock (h)

Odessa fire (i)

IPO Costs (j)

Underwriting fees related to offering of common stock (g)

Odessa fire (h)

Adjusted EBITDA

Net income (loss) margin

Net loss margin

Adjusted EBITDA margin

(a) Represents severance and other costs for our executive management changes.

(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 non-cash stock-based compensation expense.

(d) Represents fees paid to external consultants for our strategic initiatives.

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

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

(g) Other costs consist of other discrete items as determined by management, primarily including (i) fees paid to external advisors for various matters, (ii) non-cash adjustments to record the step-up in the fair value of inventory related to the acquisitions of GL International, LLC and Radiant, which are amortized through cost of sales in the condensed consolidated statements of operations, (iii) gain on sale of equity method investment, and (iv) other items.

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

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

(j) These expenses are primarily composed of legal, accounting and professional fees incurred in connection with our IPO (as defined below) that are not capitalizable, which are included within selling, general and administrative expense.

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

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

(h) Represents costs incurred and insurance recoveries in excess of costs incurred for the period related to a production facility fire in Odessa, Texas.

(i) Other costs consist of other discrete items as determined by management, primarily including (i) fees paid to external advisors for various matters, (ii) non-cash adjustments to record the step-up in the fair value of inventory related to the acquisition of Radiant, which was amortized through cost of sales in the condensed consolidated statements of operations, and (iii) 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 (as defined below).

Historically, we have funded working capital requirements, capital expenditures, payments related to acquisitions, and debt service requirements with internally generated cash on hand and through our term loan and revolving credit facilities (as defined below under “—Our Indebtedness”) and through the issuance of shares of our common stock.

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

As of October 1, 2022, we had $30.6 million of cash, $313.3 million of outstanding borrowings on the New Term Loan (as defined below) and an additional $75.0 million of availability under our New Revolving Credit Facility, which was undrawn.

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

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

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

As of April 1, 2023, we had $55.0 million of cash, $360.5 million of outstanding borrowings and an additional $27.0 million of borrowing availability under our 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.

Our working capital requirements fluctuate during the year, driven primarily by seasonality and the timing of raw material purchases.

Our working capital requirements fluctuate during the fiscal year, driven primarily by seasonality and the timing of raw material purchases.

Our capital expenditures are primarily related to growth, including production capacity, storage, and delivery equipment.

We are in the midst of a multi-year capital plan to invest in our facilities, technology, and systems, including investments to expand our fiberglass manufacturing capacity.

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

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

We believe that our existing cash, cash generated from operations and availability under our Revolving Credit Facility, will be adequate to fund our operating expenses and capital expenditure requirements over the next 12 months, as well as our longer-term liquidity needs.

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

On February 23, 2022, Latham Pool Products, Inc.

(“Latham Pool Products”), our wholly owned subsidiary, entered into an agreement (the “New Credit Agreement”) with Barclays Bank PLC, which provides a senior secured multicurrency revolving line of credit in an initial principal amount of $75.0 million (the “New Revolving Credit Facility”) and a U.S.

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

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

New Revolving Credit Facility

The New Revolving Credit Facility may be utilized to finance ongoing general corporate and working capital needs and permits Latham Pools Products to borrow loans in U.S.

(“Latham Pool Products”), our wholly owned subsidiary, entered into an agreement (the “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 “Revolving Credit Facility”) and a U.S.

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

On such date, proceeds under the agreement were used to repay and replace $294.0 million under, and terminate, the previous credit agreement and for general corporate purposes.

Revolving Credit Facility

The 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”.

The New Revolving Credit Facility is not subject to amortization.

The Revolving Credit Facility matures on February 23, 2027.

Loans outstanding under the 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 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 Credit Agreement), plus a margin of 2.50%.

Loans outstanding under the Revolving Credit Facility denominated in Euros or Australian Dollars bear interest based on EURIBOR or the AUD Rate (each, as defined in the Credit Agreement), respectively, plus a margin of 3.50%.

A commitment fee accrues on any unused portion of the commitments under the 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 Credit Agreement, the “First Lien Net Leverage Ratio”).

The Revolving Credit Facility is not subject to amortization.

We are also required to meet certain financial covenants, including maintaining specific liquidity measurements.

There are also negative covenants, including certain restrictions on our ability to incur additional indebtedness, create liens, make investments, consolidate or merge with other entities, enter into transactions with affiliates, make prepayments with respect to certain indebtedness and make restricted payments and other distributions.

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

New Term Loan Facility

The New Term Loan matures on February 23, 2029.

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

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

The obligations under the New Credit Agreement are guaranteed by certain of our wholly owned subsidiaries as defined in the security agreement.

The obligations under the New Credit Agreement are secured by substantially all of the guarantors’ tangible and intangible assets, including, but not limited to, their accounts receivables, equipment, intellectual property, inventory, cash and cash equivalents, deposit accounts and security accounts.

The New Credit Agreement also restricts payments and other distributions unless certain conditions are met, which could restrict our ability to pay dividends.

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

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

Prior Revolving Credit Facility

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

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

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

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 our acquisition of Narellan Group Pty Limited and its subsidiaries (the “First Amendment”).

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

The Second Amendment was further amended on January 25, 2021, to provide an additional incremental term loan of $175.0 million (the “Third Amendment”).

On January 25, 2021, Latham Pool Products borrowed the incremental term loan, and the proceeds were used on February 2, 2021 to purchase and retire equity interests and to pay a distribution.

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

On November 24, 2021, we amended the Term Loan to provide additional borrowings of $50.0 million (the “Fifth Amendment”).

The proceeds from this incremental term loan were used to finance the Radiant Acquisition in part.

The Term Loan, collectively with the First Amendment, Second Amendment, Third Amendment, the Fourth Amendment and the Fifth Amendment, is referred to as the “Amended Term Loan.” The Amended Term Loan was terminated in connection with the Refinancing.

There are also negative covenants, including certain restrictions on our ability and the ability of our subsidiaries 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, make dividend payments, loans, or advances to the Company, declare dividends and make restricted payments and other distributions.

As of April 1, 2023, we had $48.0 million of outstanding borrowings under the Revolving Credit Facility.

The Term Loan matures on February 23, 2029.

Loans outstanding under the Term Loan bear interest, at the borrower’s option, at a rate per annum based on Term SOFR (as defined in the 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 are subject to scheduled quarterly amortization payments equal to 0.25% of the initial principal amount of the Term Loan.

The obligations under the Credit Agreement are guaranteed by certain of our wholly owned subsidiaries as defined in the security agreement.

The obligations under the Credit Agreement are secured by substantially all of the guarantors’ tangible and intangible assets, including, but not limited to, their accounts receivables, equipment, intellectual property, inventory, cash and cash equivalents, deposit accounts and security accounts.

The Credit Agreement also restricts payments and other distributions unless certain conditions are met, which could restrict our ability to pay dividends.

As of April 1, 2023, we had $312.5 million of outstanding borrowings under the Term Loan.

As of April 1, 2023, we were in compliance with all covenants under the Revolving Credit Facility and the Term Loan.

Share Repurchase Program

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We may effect these repurchases in open market transactions, privately negotiated purchases or other acquisitions.

We are not obligated to repurchase any of our shares of our common stock under the Repurchase Program and the timing and amount of any repurchases will depend on market conditions, our stock price, alternative uses of capital, the terms of our debt instruments and other factors.

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

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

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.

As of April 1, 2023, approximately $77.0 million remained available for share repurchases pursuant to our Repurchase Program.

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

Three Fiscal Quarters Ended

October 1, 2022

October 2, 2021

Fiscal Quarter Ended

April 1, 2023

April 2, 2022

(in thousands)

Net cash provided by operating activities

Net cash used in operating activities

Net cash used in investing activities

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Effect of exchange rate changes on cash

Net (decrease) increase in cash

Net increase (decrease) in cash

Operating Activities

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

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

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

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

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

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

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

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

Cash provided by operating activities was further driven by changes in our operating assets and liabilities, which used $45.9 million.

Net cash used in changes in our operating assets and liabilities for the three fiscal quarters ended October 2, 2021 consisted primarily of a $43.1 million increase in trade receivables, a $16.1 million increase in inventories, a $4.8 million increase in prepaid expenses and other current assets, a $1.8 million increase in income tax receivable, and a $0.5 million increase in other assets, partially offset by a $10.6 million increase in accounts payable, a $9.7 million increase in accrued expenses and other current liabilities, and a $0.1 million increase in other long-term liabilities.

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

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

During the fiscal quarter ended April 1, 2023, operating activities used $14.5 million of cash.

Net loss, after adjustments for non-cash items, provided cash of $11.4 million.

Cash used in operating activities was further driven by changes in our operating assets and liabilities, which used $25.8 million.

Net cash used in changes in our operating assets and liabilities for the fiscal quarter ended April 1, 2023 consisted primarily of a $55.3 million increase in trade receivables, a $2.8 million increase in income tax receivable, a $1.2 million increase in other assets, a $0.6 million increase in prepaid expenses and other current assets, and a $3.2 million decrease in accrued expenses and other current liabilities, partially offset by, a $15.6 million decrease in inventories, a $20.9 million increase in accounts payable, and a $0.7 million increase in other long-term liabilities.

The change in trade receivables was primarily driven by the timing of net sales, and the decrease in inventories was primarily driven by efforts to meet demand outlook while maintaining lead times and service levels.

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

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

Net loss, after adjustments for non-cash items, provided cash of $38.6 million.

Cash used in operating activities was further driven by changes in our operating assets and liabilities, which used $96.1 million.

Net cash used in changes in our operating assets and liabilities for the fiscal quarter ended April 2, 2022 consisted primarily of a $78.9 million increase in trade receivables, a $30.5 million increase in inventories, a $0.8 million increase in prepaid expenses and other current assets, a $0.3 million increase in other assets, a $3.2 million decrease in accrued expenses and other current liabilities, partially offset by a $17.5 million increase in accounts payable, and a $0.3 million increase in other long-term liabilities.

The change in trade receivables was primarily driven by the timing of, and increase in, net sales, and the increase in inventories was primarily driven by a strategic decision to carry more inventory in an attempt to minimize the impact of any supply chain interruptions as well as higher costs.

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

Investing Activities

During the three fiscal quarters ended October 1, 2022, investing activities used $29.4 million of cash, primarily consisting of purchases of property and equipment for $29.0 million and the settlement of the net working capital adjustment related to the acquisition of Radiant for $0.4 million.

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

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

During the fiscal quarter ended April 1, 2023, investing activities used $9.9 million of cash, consisting of purchases of property and equipment for $9.9 million.

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

During the fiscal quarter ended April 2, 2022, investing activities used $6.7 million of cash, consisting of purchases of property and equipment.

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

Financing Activities

During the three fiscal quarters ended October 1, 2022, financing activities provided $12.6 million of cash, primarily consisting of proceeds from long-term debt borrowings in connection with the Refinancing of $320.1 million, proceeds from the sale of common stock of $257.7 million and borrowings on revolving credit facilities of $25.0 million, partially offset by repayments on long-term debt

borrowings of $285.6 million, the repurchase and retirement of common stock of $272.7 million, repayments on revolving credit facility borrowings of $25.0 million, and deferred financing fees paid of $6.9 million.

During the three fiscal quarters ended October 2, 2021, financing activities provided $14.3 million of cash, primarily consisting of proceeds from our initial public offering, completed on April 27, 2021 (the “IPO”), net of underwriting discounts, commissions and offering costs of $399.3 million, proceeds from long-term debt borrowings of $172.8 million and borrowings on the revolving credit facilities of $16.0 million, partially offset by the repurchase and retirement of common stock of $281.6 million, payments on long-term debt borrowings of $164.8 million, dividends to Class A unitholders of $110.0 million, and payments on revolving credit facility borrowings of $16.0 million.

During the fiscal quarter ended April 1, 2023, financing activities provided $47.1 million of cash, primarily consisting of borrowings on revolving credit facilities of $48.0 million, partially offset by repayments on long-term debt borrowings of $0.8 million, and repayments of finance lease obligations of $0.1 million.

During the fiscal quarter ended April 2, 2022, financing activities provided $39.3 million of cash, primarily consisting of proceeds from long-term debt borrowings in connection with the Refinancing of $320.1 million, proceeds from the sale of common stock of

$257.7 million and borrowings on revolving credit facilities of $20.0 million, partially offset by repayments on long-term debt borrowings of $284.0 million, the repurchase and retirement of common stock of $257.7 million, repayments on revolving credit facility borrowings of $10.0 million, and deferred financing fees paid of $6.9 million.

Contractual Obligations

There have been no material changes, outside of the ordinary course of business, to our contractual obligations during the three fiscal quarters ended October 1, 2022 from those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” in our Annual Report.

There have been no material changes, outside of the ordinary course of business, to our contractual obligations during the fiscal quarter ended April 1, 2023 from those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” in our Annual Report.

Critical Accounting Policies and Estimates

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Throughout the preparation of these financial statements, we have made estimates and assumptions that impact the reported amounts of assets, liabilities, and the disclosure of contingent liabilities at the date of the financial statements and revenues and expenses during the reporting period.

Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report.

Our critical accounting policies are described below and under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report.

These estimates are based on historical results, trends, and other assumptions we believe to be reasonable.

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For additional information about our critical accounting policies and estimates, see the disclosure included in our Annual Report as well as Note 2 - Summary of Significant Accounting Policies in the notes to the condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

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

Impairment of Goodwill

We evaluate goodwill for impairment at least annually, or more frequently when events or changes in circumstances indicate that the carrying value may not be recoverable.

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

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.

The qualitative assessment requires significant judgments by management about economic conditions including the entity’s operating environment, its industry and other market considerations, entity-specific events related to financial performance or loss of key personnel, and other events that could impact the reporting unit.

If management concludes, based on assessment of relevant events, facts, and circumstances, that it is more likely than not that the reporting unit’s fair value is greater than its carrying value, no further impairment testing is required.

If our assessment of qualitative factors indicates that it is more likely than not that the fair value of the reporting unit is less than its carrying value, then a quantitative assessment is performed.

We may also elect to initially perform a quantitative analysis instead of starting with step zero.

The quantitative analysis requires comparing the carrying value of the reporting unit, including goodwill, to its fair value.

If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and no further testing is required.

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.

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

The qualitative factors we assessed as part of our annual impairment testing 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.

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.

Subsequent to April 1, 2023, our stock price has declined to a level that may require us to analyze goodwill for impairment and could result in a non-cash impairment charge during the fiscal quarter ended July 1, 2023 or in subsequent periods.

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.

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Item 2. Management’s Discussion and Analysis