What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-08 compared with 2023-05-09 · 158 added, 112 removed, 185 unchanged (59% of the section changed)

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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.

Our operations consist of approximately 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.

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Recent Developments

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.

Highlights for the fiscal quarter ended July 1, 2023

● Decrease in net sales of 14.3%, or $29.7 million, to $177.1 million for the fiscal quarter ended July 1, 2023, compared to $206.8 million for the fiscal quarter ended July 2, 2022.

● Increase in net income of $1.4 million to $5.7 million and representing a 3.2% net income margin for the fiscal quarter ended July 1, 2023, compared to net income of $4.3 million for the fiscal quarter ended July 2, 2022.

● Decrease in Adjusted EBITDA (as defined below) of $17.7 million to $31.0 million for the fiscal quarter ended July 1, 2023, compared to $48.7 million for the fiscal quarter ended July 2, 2022.

Highlights for the two fiscal quarters ended July 1, 2023

● Decrease in net sales of 21.0%, or $83.6 million, to $314.8 million for the two fiscal quarters ended July 1, 2023, compared to $398.4 million for the two fiscal quarters ended July 2, 2022.

● Increase in net loss of $10.2 million to $8.7 million and representing a (2.7%) net loss margin for the two fiscal quarters ended July 1, 2023, compared to net income of $1.5 million for the two fiscal quarters ended July 2, 2022.

● Decrease in Adjusted EBITDA (as defined below) of $54.6 million to $42.0 million for the two fiscal quarters ended July 1, 2023, compared to $96.6 million for the two fiscal quarters ended July 2, 2022.

Business Update

Market conditions continue to evolve.

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.

As anticipated, ongoing macroeconomic challenges are weighing on consumer spending and demand.

This is resulting in a decline in U.S.

new in-ground residential pool installations in 2023.

We continue to make progress executing our strategy to drive material conversion from concrete to fiberglass swimming pools, 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.

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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.

In the fourth fiscal quarter of 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.

We expect to generate annual operating expense savings of $12.0 million in fiscal 2023 as a result of our 2022 cost reduction plan.

During the second and early third fiscal quarters of 2023, we took actions to further reduce our manufacturing overhead, headcount, and discretionary spend.

We expect to realize an additional $12.0 million of annualized savings from these actions, with $6.0 million to be realized this fiscal year and therefore a total of $18.0 million of cost savings in 2023 from the two cost reduction plans.

Key Performance Indicators

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We use Adjusted EBITDA and Adjusted EBITDA margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to 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 define Adjusted EBITDA as net income (loss) plus (i) depreciation and amortization, (ii) interest expense, net, (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 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, including how such non-GAAP measures provide useful information to investors, how management utilizes them 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

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

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

Fiscal Quarter Ended

April 1, 2023

April 2, 2022

(dollars in thousands)

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Selling, general, and administrative expense

Income from operations

Other expense (income):

Interest expense, net

Loss on extinguishment of debt

Other (income) expense, net

Total other expense, net

Earnings from equity method investment

Income before income taxes

Income tax expense

Adjusted EBITDA (a)

________________________________________

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

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

Net sales were $177.1 million for the fiscal quarter ended July 1, 2023, compared to $206.8 million for the fiscal quarter ended July 2, 2022.

The $29.7 million, or 14.3%, decrease in net sales was because of a $35.9 million decrease in sales volume, partially offset by a $6.2 million increase from higher pricing.

The volume decrease was primarily driven by continued macroeconomic challenges.

The decrease in total net sales of $29.7 million across our product lines consisted of $21.6 million for in-ground swimming pools and $9.6 million for covers, partially offset by a $1.5 million increase in liners.

Cost of Sales and Gross Margin

Cost of sales was $126.9 million for the fiscal quarter ended July 1, 2023, compared to $139.2 million for the fiscal quarter ended July 2, 2022.

Gross margin decreased by 4.3%, to 28.4% of net sales for the fiscal quarter ended July 1, 2023, compared to 32.7% of net sales for the fiscal quarter ended July 2, 2022.

The $12.3 million, or 8.8%, decrease in cost of sales was primarily the result of the decrease in sales volume and a $1.8 million decrease in non-cash stock-based compensation expense.

The 4.3% decrease in gross margin was primarily driven by reduced sales, sell-through of higher cost inventory, the impact of inflation, and the right sizing of our inventory, partially offset by price increases and the benefits of our cost reduction actions taken in the fourth quarter of fiscal 2022 and second quarter of fiscal 2023.

Selling, General, and Administrative Expense

Selling, general, and administrative expense was $30.2 million for the fiscal quarter ended July 1, 2023, compared to $41.8 million for the fiscal quarter ended July 2, 2022, and decreased as a percentage of net sales by 3.1%.

The $11.6 million, or 27.7%, decrease in selling, general, and administrative expense was primarily driven by an $8.9 million decrease in non-cash stock-based compensation expense, lower incentive accruals, and the benefits from our cost reduction actions taken in the fourth quarter of fiscal 2022 and the second quarter of fiscal 2023.

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

The $0.6 million, or 7.3%, decrease in amortization was driven by certain definite-lived intangible assets becoming fully amortized during the fiscal year ended December 31, 2022.

Interest Expense, net

Interest expense, net was $4.5 million for the fiscal quarter ended July 1, 2023, compared to $3.2 million for the fiscal quarter ended July 2, 2022.

The $1.3 million, or 41.8%, increase in interest expense, net was primarily the result of a higher effective interest rate, compared to the fiscal quarter ended July 2, 2022, partially offset by the change in the fair value of our interest rate swaps.

Interest expense, net for the fiscal quarter ended July 1, 2023 was impacted by an unrealized gain of $1.9 million related to the change in fair value of our interest rate swaps compared to an unrealized gain of $1.1 million for the fiscal quarter ended July 2, 2022.

Other (Income) Expense, Net

Other (income) expense, net was $(1.0) million for the fiscal quarter ended July 1, 2023, compared to $0.9 million for fiscal quarter ended July 2, 2022.

The $1.9 million increase in other income was primarily driven by 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 $0.7 million for the fiscal quarter ended July 1, 2023, compared to $0.7 million for the fiscal quarter ended July 2, 2022, because of the consistent financial performance of Premier Pools & Spa.

Income Tax Expense

Income tax expense was $4.9 million for the fiscal quarter ended July 1, 2023, compared to income tax expense of $11.0 million for the fiscal quarter ended July 2, 2022.

Our effective tax rate was 46.1% for the fiscal quarter ended July 1, 2023, compared to 71.9% for the fiscal quarter ended July 2, 2022.

The difference between the U.S.

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

Net income was $5.7 million for the fiscal quarter ended July 1, 2023, compared to $4.3 million for the fiscal quarter ended July 2, 2022.

The $1.4 million, or 32.8%, increase in net income was primarily because of the factors described above.

Net Income Margin

Net income margin was 3.2% for the fiscal quarter ended July 1, 2023, compared to 2.1% for the fiscal quarter ended July 2, 2022.

The 1.1% increase in net income margin was driven by a $1.4 million increase in net income and a $29.7 million decrease in net sales, compared to the fiscal quarter ended July 2, 2022 because of the factors described above.

Adjusted EBITDA

Adjusted EBITDA was $31.0 million for the fiscal quarter ended July 1, 2023, compared to $48.7 million for the fiscal quarter ended July 2, 2022.

The $17.7 million, or 36.3%, decrease in Adjusted EBITDA was primarily because of the decrease in net sales and partially offset by the reduction in SG&A expenses, as well as the other factors described above.

Adjusted EBITDA Margin

Adjusted EBITDA margin was 17.5% for the fiscal quarter ended July 1, 2023, compared to 23.5% for the fiscal quarter ended July 2, 2022.

The 6.0% decrease in Adjusted EBITDA margin was primarily because of a $17.7 million decrease in Adjusted EBITDA and a $29.7 million decrease in net sales, compared to the fiscal quarter ended July 2, 2022, which were impacted by the factors described above.

Two Fiscal Quarters Ended July 1, 2023 Compared to Two Fiscal Quarters Ended July 2, 2022

The following table summarizes our results of operations for the two fiscal quarters ended July 1, 2023 and July 2, 2022:

Two Fiscal Quarters Ended

(dollars in thousands)

Cost of sales

Selling, general, and administrative expense

Underwriting fees related to offering of common stock

(Loss) income from operations

Income from operations

Other expense (income):

Interest expense

Interest expense, net

Loss on extinguishment of debt

Other expense (income), net

Other (income) expense, net

Total other expense, net

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(Loss) income before income taxes

Income tax (benefit) expense

Income tax expense

Net (loss) income

Adjusted EBITDA (a)

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

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.

See “Non-GAAP Financial 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 $314.8 million for the two fiscal quarters ended July 1, 2023, compared to $398.4 million for the two fiscal quarters ended July 2, 2022.

The $83.6 million, or 21.0%, decrease in net sales was because of a $93.1 million decrease in sales volume, partially offset by a $9.5 million increase from higher pricing.

The volume was primarily attributable to the pool market returning to pre-2020 seasonality in the first quarter of fiscal 2023 and continuing macroeconomic challenges.

The decrease in total net sales of $83.6 million across our product lines consisted of $54.9 million for in-ground swimming pools, $19.3 million for liners and $9.4 million in covers.

Cost of Sales and Gross Margin

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.

Cost of sales was $231.2 million for the two fiscal quarters ended July 1, 2023, compared to $260.2 million for the two fiscal quarters ended July 2, 2022.

Gross margin decreased by 8.1%, to 26.6% of net sales for the two fiscal quarters ended July 1, 2023 compared to 34.7% of net sales for the two fiscal quarters ended July 2, 2022.

The $29.0 million, or 11.1%, decrease in cost of sales was primarily the result of the decrease in sales volume and a $2.5 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.

The 8.1% decrease in gross margin was primarily driven by reduced sales, sell-through of higher cost inventory, negative fixed cost leverage from year-over-year volume declines, the impact of inflation, and the right sizing of our inventory.

Selling, General, and Administrative Expense

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.

Selling, general, and administrative expense was $63.3 million for the two fiscal quarters ended July 1, 2023, compared to $87.0 million for the two fiscal quarters ended July 2, 2022, and decreased as a percentage of net sales by 1.7%.

The $23.7 million, or 27.3%, decrease in selling, general, and administrative expense was primarily driven by an $18.3 million decrease in non-cash stock-based compensation expense, lower incentive accruals, and benefits from the cost reduction actions taken in the fourth quarter of fiscal 2022 and the second quarter of fiscal 2023.

Underwriting Fees Related to Offering of Common Stock

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

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

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

Amortization was $13.3 million for the two fiscal quarters ended July 1, 2023, compared to $14.3 million for the two fiscal quarters ended July 2, 2022.

The $1.0 million, or 7.5%, 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 $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.

Interest Expense, net

Interest expense, net was $15.3 million for the two fiscal quarters ended July 1, 2023, compared to $4.9 million for the two fiscal quarters ended July 2, 2022.

The $10.4 million, or 210.2%, increase in interest expense, net 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 two fiscal quarters ended July 2, 2022.

Interest expense, net for the two fiscal quarters ended July 1, 2023 was impacted by an unrealized loss of $2.9 million related to the change in fair value of our interest rate swaps compared to an unrealized gain of $3.9 million for the two fiscal quarters ended July 2, 2022.

Loss on Extinguishment of Debt

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 $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.

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

Other (Income) Expense, Net

Other (income) expense, net was $(0.8) million for the two fiscal quarters ended July 1, 2023, compared to $0.6 million for the two fiscal quarters ended July 2, 2022.

The $1.4 million increase in other income was primarily driven by 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 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.

Earnings from our equity method investment in Premier Pools & Spa were $0.7 million for the two fiscal quarters ended July 1, 2023, compared to $1.3 million for the two fiscal quarters ended July 2, 2022, because of the financial performance of Premier Pools & Spa.

Income Tax Expense

Income tax expense was $2.0 million for the two fiscal quarters ended July 1, 2023, compared to income tax expense of $16.3 million for the two fiscal quarters ended July 2, 2022.

Our effective tax rate was (29.2)% for the two fiscal quarters ended July 1, 2023, compared to 91.8% for the two fiscal quarters ended July 2, 2022.

The difference between the U.S.

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.

Net (Loss) Income

Net loss was $8.7 million for the two fiscal quarters ended July 1, 2023, compared to $1.5 million of net income for the two fiscal quarters ended July 2, 2022.

The $10.2 million, or 691.5%, 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.

Net (Loss) Income Margin

Net loss margin was (2.7%) for the two fiscal quarters ended July 1, 2023, compared to net income margin of 0.4% for the two fiscal quarters ended July 2, 2022.

The 3.1% increase in net loss margin was driven by a $10.2 million increase in net loss and an $83.6 million decrease in net sales, compared to the two fiscal quarters ended July 2, 2022 because of the factors described above.

Adjusted EBITDA

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.

Adjusted EBITDA was $42.0 million for the two fiscal quarters ended July 1, 2023, compared to $96.6 million for the two fiscal quarters ended July 2, 2022.

The $54.6 million, or 56.5%, 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 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.

Adjusted EBITDA margin was 13.3% for the two fiscal quarters ended July 1, 2023, compared to 24.2% for the two fiscal quarters ended July 2, 2022.

The 10.9% decrease in Adjusted EBITDA margin was primarily because of a $54.6 million decrease in Adjusted EBITDA and an $83.6 million decrease in net sales, compared to the two fiscal quarters ended July 2, 2022, which were impacted by 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.

Management believes it is useful to investors and analysts to evaluate these non-GAAP measures for the same reasons and on the same basis as management the board use them to evaluate our operating results.

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.

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, net, (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 (loss) 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.

You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis.

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● do not reflect changes in our working capital needs;

● do not reflect the interest expense, or the amounts necessary to service interest or principal payments, on our outstanding debt;

● do not reflect the interest expense, net, or the amounts necessary to service interest or principal payments, on our outstanding debt;

● 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;

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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 loss 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:

Fiscal Quarter Ended

April 1, 2023

April 2, 2022

(in thousands)

Two Fiscal Quarters Ended

(dollars in thousands)

Net income (loss)

Depreciation and amortization

Interest expense

Income tax (benefit) expense

Interest expense, net

Income tax expense

Loss on sale and disposal of property and equipment

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Stock-based compensation expense (b)

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

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

Strategic initiative costs (d)

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Adjusted EBITDA

Net loss margin

Net income (loss) margin

Adjusted EBITDA margin

(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.

Also includes severance and other costs for our executive management changes and additional costs related to our 2023 cost reduction plan which includes further actions to reduce our manufacturing overhead by reducing headcount, and restricting discretionary spend.

(b) Represents non-cash stock-based compensation expense.

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

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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.

As of July 1, 2023, we had $43.1 million of cash, $312.0 million of outstanding borrowings and an additional $75.0 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.

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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 are in the midst of a multi-year capital plan to invest in our facilities, technology, and systems.

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.

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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.

On such date, proceeds under the Credit 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

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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.

As of July 1, 2023, we had no outstanding borrowings under the Revolving Credit Facility and $75.0 million was available for future borrowing.

The Term Loan matures on February 23, 2029.

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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.

As of July 1, 2023, we had $312.0 million of outstanding borrowings under the Term Loan.

As of July 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 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.

We did not repurchase any shares of our common stock during the fiscal quarter ended July 1, 2023.

As of July 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:

Fiscal Quarter Ended

April 1, 2023

April 2, 2022

Two Fiscal Quarters Ended

(in thousands)

Net cash used in operating activities

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net cash (used in) provided by financing activities

Effect of exchange rate changes on cash

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Operating Activities

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

During the two fiscal quarters ended July 1, 2023, operating activities provided $36.3 million of cash.

Net loss, after adjustments for non-cash items, provided cash of $35.6 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.

Cash provided by operating activities was further driven by changes in our operating assets and liabilities, which provided $0.7 million.

Net cash used by changes in our operating assets and liabilities for the two fiscal quarters ended July 1, 2023 consisted primarily of a $37.3 million increase in trade receivables, a $6.9 million decrease in accrued expenses and other current liabilities, a $1.4 million increase in income tax receivable, a $0.9 million increase in prepaid expenses and other current assets, a $0.4 million increase in other assets, and a $0.2 million decrease in other long-term liabilities, partially offset by, a $38.9 million decrease in inventories, and a $8.9 million increase in accounts payable.

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.

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

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

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

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

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.

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

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

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

Investing Activities

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.

During the two fiscal quarters ended July 1, 2023, investing activities used $23.4 million of cash, consisting of purchases of property and equipment for $23.4 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.

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

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

Financing Activities

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.

During the two fiscal quarters ended July 1, 2023, financing activities used $1.9 million of cash, primarily consisting of repayments on revolving credit facilities of $48.0 million, repayments on long-term debt borrowings of $1.6 million, and repayments of finance lease obligations of $0.3 million, partially offset by borrowings on revolving credit facilities of $48.0 million.

During the two fiscal quarters ended July 2, 2022, financing activities provided $13.4 million of cash, primarily consisting of proceeds from long-term debt borrowings in connection with the Refinancing of $320.1 million, proceeds from the sale of common stock of $257.7 million and borrowings on revolving credit facilities of $25.0 million, partially offset by repayments on long-term debt borrowings of $284.8 million, the repurchase and retirement of common stock of $272.7 million, repayments on revolving credit facilities borrowings of $25.0 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 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.

There have been no material changes, outside of the ordinary course of business, to our contractual obligations during the two fiscal quarters ended July 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 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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Actual results may differ from estimates.

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.

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.

For additional information about our critical accounting policies and estimates, see the disclosure included in our Annual Report and our Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2023 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.

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-Q

Item 2. Management’s Discussion and Analysis