What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-08 · 138 added, 109 removed, 234 unchanged (51% of the section changed)

4 unchanged sentences

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.

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, the implementation of our cost reduction plans and expected annualized cost savings, a potential non-cash impairment charge for goodwill , 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.

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 and as described in other subsequent reports we file or furnish with the SEC, including elsewhere in this Quarterly Report on Form 10-Q.

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

24 unchanged sentences

Recent Developments

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.

Highlights for the fiscal quarter ended September 30, 2023

● Decrease in net sales of 15.1%, or $28.6 million, to $160.8 million for the fiscal quarter ended September 30, 2023, compared to $189.4 million for the fiscal quarter ended October 1, 2022.

● Decrease in net income of $5.7 million to $6.2 million and representing a 3.8% net income margin for the fiscal quarter ended September 30, 2023, compared to net income of $11.9 million for the fiscal quarter ended October 1, 2022.

● Decrease in Adjusted EBITDA (as defined below) of $6.2 million to $36.1 million for the fiscal quarter ended September 30, 2023, compared to $42.3 million for the fiscal quarter ended October 1, 2022.

Highlights for the three fiscal quarters ended September 30, 2023

● Decrease in net sales of 19.1%, or $112.2 million, to $475.6 million for the three fiscal quarters ended September 30, 2023, compared to $587.8 million for the three fiscal quarters ended October 1, 2022.

● Decrease in net income of $15.8 million to a net loss of $2.5 million and representing a 0.5% net loss margin for the three fiscal quarters ended September 30, 2023, compared to net income of $13.3 million for the three fiscal quarters ended October 1, 2022.

● Decrease in Adjusted EBITDA (as defined below) of $60.8 million to $78.1 million for the three fiscal quarters ended September 30, 2023, compared to $138.9 million for the three fiscal quarters ended October 1, 2022.

Business Update

2 unchanged sentences

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.

new in-ground residential pool installations in 2023 and we expect this to continue into 2024.

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.

This includes the completion of our Kingston, Ontario facility in April 2023 as well as our acquired fiberglass manufacturing assets in Seminole, Oklahoma.

We have responded to economic uncertainty with immediate actions to reduce our costs.

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.

In the fourth fiscal quarter of 2022, we approved a cost reduction plan and expect to realize $12.0 million of savings during the 2023 fiscal year.

During the second and third fiscal quarters of 2023, we initiated additional plans to further reduce our manufacturing overhead, headcount, and discretionary spend.

We expect to realize an additional $12.0 million of annualized savings from the plans implemented in 2023, with $6.0 million expected to be realized this fiscal year and therefore a total of $18.0 million of cost savings in 2023, with the remaining $6.0 million expected to be realized in 2024.

Leadership Transition

On October 24, 2023, we announced that Oliver Gloe was appointed as our Chief Financial Officer effective November 13, 2023.

Mark Borseth concurrently will step down as our Interim Chief Financial Officer and resume his previous role of Strategic Advisor through the end of 2023.

Key Performance Indicators

18 unchanged sentences

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 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, 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.

4 unchanged sentences

Results of Operations

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 September 30, 2023 Compared to Fiscal Quarter Ended October 1, 2022

The following table summarizes our results of operations for the fiscal quarter ended September 30, 2023 and October 1, 2022:

Fiscal Quarter Ended

September 30, 2023

October 1, 2022

(dollars in thousands)

2 unchanged sentences

Income from operations

Other expense (income):

Other expense:

Interest expense, net

Loss on extinguishment of debt

Other (income) expense, net

Other expense, net

Total other expense, net

6 unchanged sentences

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.

Net sales were $160.8 million for the fiscal quarter ended September 30, 2023, compared to $189.4 million for the fiscal quarter ended October 1, 2022.

The $28.6 million, or 15.1%, decrease in net sales was because of a $32.8 million decrease in sales volume, partially offset by a $4.2 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.

The decrease in total net sales of $28.6 million across our product lines consisted of $19.5 million for in-ground swimming pools, $4.7 million for liners and $4.5 million for covers.

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.

Cost of sales was $112.6 million for the fiscal quarter ended September 30, 2023, compared to $130.5 million for the fiscal quarter ended October 1, 2022.

Gross margin decreased by 1.2%, to 29.9% of net sales for the fiscal quarter ended September 30, 2023, compared to 31.1% of net sales for the fiscal quarter ended October 1, 2022.

The $17.9 million, or 13.7%, decrease in cost of sales was primarily the result of the decrease in sales volume and a $0.6 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.

The 1.2% decrease in gross margin was primarily driven by reduced net sales, the right sizing of our inventory and the sell-through of higher cost inventory, partially offset by some material cost deflation, benefits from pricing levels and improving fixed costs as a result of our cost reduction actions.

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.

Selling, general, and administrative expense was $23.4 million for the fiscal quarter ended September 30, 2023, compared to $26.7 million for the fiscal quarter ended October 1, 2022, and increased as a percentage of net sales by 0.5%.

The $3.3 million, or 12.4%, decrease in selling, general, and administrative expense was primarily driven by a $4.1 million decrease in non-cash stock-based compensation expense and lower employee incentive accruals.

Amortization was $6.6 million for the fiscal quarter ended September 30, 2023, compared to $7.2 million for the fiscal quarter ended October 1, 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.

Interest expense, net was $6.0 million for the fiscal quarter ended September 30, 2023, compared to $4.3 million for the fiscal quarter ended October 1, 2022.

The $1.7 million, or 40.2%, increase in interest expense, net was primarily the result of a higher effective interest rate, compared to the fiscal quarter ended October 1, 2022, partially offset by the change in the fair value of our interest rate swaps.

Interest expense, net for the fiscal quarter ended September 30, 2023 was impacted by an unrealized gain of $1.1 million related to the change in fair value of our interest rate swaps compared to an unrealized gain of $0.3 million for the fiscal quarter ended October 1, 2022.

Other Expense, Net

Other expense, net was $1.0 million for the fiscal quarter ended September 30, 2023, compared to $1.1 million for fiscal quarter ended October 1, 2022.

The $0.1 million decrease in other expense 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.

Earnings from our equity method investment in Premier Pools & Spa were $1.8 million for the fiscal quarter ended September 30, 2023, compared to $1.3 million for the fiscal quarter ended October 1, 2022, because of the 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.

Income tax expense was $6.7 million for the fiscal quarter ended September 30, 2023, compared to income tax expense of $9.1 million for the fiscal quarter ended October 1, 2022.

Our effective tax rate was 52.1% for the fiscal quarter ended September 30, 2023, compared to 43.4% for the fiscal quarter ended October 1, 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.

federal statutory income tax rate and our effective income tax rate for both the fiscal quarters ended September 30, 2023 and October 1, 2022 was primarily attributable to the discrete impact of stock-based compensation expense for which there is no associated tax benefit.

Net income was $6.2 million for the fiscal quarter ended September 30, 2023, compared to $11.9 million for the fiscal quarter ended October 1, 2022.

The $5.7 million, or 48.2%, decrease 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.

Net income margin was 3.8% for the fiscal quarter ended September 30, 2023, compared to 6.3% for the fiscal quarter ended October 1, 2022.

The 2.5% decrease in net income margin was driven by a $5.7 million decrease in net income and a $28.6 million decrease in net sales, compared to the fiscal quarter ended October 1, 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 was $36.1 million for the fiscal quarter ended September 30, 2023, compared to $42.3 million for the fiscal quarter ended October 1, 2022.

The $6.2 million, or 14.6%, decrease in Adjusted EBITDA was primarily because of the decrease in net sales, 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

Adjusted EBITDA margin was 22.4% for the fiscal quarter ended September 30, 2023, compared to 22.3% for the fiscal quarter ended October 1, 2022.

The 0.1% increase in Adjusted EBITDA margin was primarily because of a $6.2 million decrease in Adjusted EBITDA and a $28.6 million decrease in net sales, compared to the fiscal quarter ended October 1, 2022, which were impacted by the factors described above.

Three Fiscal Quarters Ended September 30, 2023 Compared to Three Fiscal Quarters Ended October 1, 2022

The following table summarizes our results of operations for the three fiscal quarters ended September 30, 2023 and October 1, 2022:

Three Fiscal Quarters Ended

September 30, 2023

October 1, 2022

(dollars in thousands)

3 unchanged sentences

Income from operations

Other expense (income):

Other expense:

Interest expense, net

Loss on extinguishment of debt

Other (income) expense, net

Other expense, net

Total other expense, net

Earnings from equity method investment

(Loss) income before income taxes

Income before income taxes

Income tax expense

3 unchanged sentences

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.

Net sales were $475.6 million for the three fiscal quarters ended September 30, 2023, compared to $587.8 million for the three fiscal quarters ended October 1, 2022.

The $112.2 million, or 19.1%, decrease in net sales was because of a $125.9 million decrease in sales volume, partially offset by a $13.7 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 volume decrease was due to continued macroeconomic challenges.

The decrease in total net sales of $112.2 million across our product lines consisted of $74.3 million for in-ground swimming pools, $24.0 million for liners and $13.9 million in covers.

Cost of Sales and Gross Margin

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.

Cost of sales was $343.9 million for the three fiscal quarters ended September 30, 2023, compared to $390.7 million for the three fiscal quarters ended October 1, 2022.

Gross margin decreased by 5.8%, to 27.7% of net sales for the three fiscal quarters ended September 30, 2023 compared to 33.5% of net sales for the three fiscal quarters ended October 1, 2022.

The $46.8 million, or 12.0%, decrease in cost of sales was primarily the result of the decrease in sales volume and a $3.1 million decrease in 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.

The 5.8% decrease in gross margin was primarily driven by reduced net sales, sell-through of higher cost inventory, the right sizing of our inventory and negative fixed cost leverage from year-over-year volume declines, partially offset by benefits from our pricing levels, some material cost deflation and improved productivity.

Selling, General, and Administrative Expense

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.

Selling, general, and administrative expense was $86.7 million for the three fiscal quarters ended September 30, 2023, compared to $113.8 million for the three fiscal quarters ended October 1, 2022, and decreased as a percentage of net sales by 1.2%.

The $27.1 million, or 23.8%, decrease in selling, general, and administrative expense was primarily driven by a $22.4 million decrease in non-cash stock-based compensation expense, lower incentive accruals, and wages on lower headcount.

Underwriting Fees Related to Offering of Common Stock

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

Amortization was $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.

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 $19.9 million for the three fiscal quarters ended September 30, 2023, compared to $21.5 million for the three fiscal quarters ended October 1, 2022.

The $1.6 million, or 7.4%, 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 $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.

Interest expense, net was $21.3 million for the three fiscal quarters ended September 30, 2023, compared to $9.2 million for the three fiscal quarters ended October 1, 2022.

The $12.1 million, or 131.4%, 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 three fiscal quarters ended October 1, 2022.

Interest expense, net for the three fiscal quarters ended September 30, 2023 was impacted by an unrealized loss of $1.8 million related to the change in fair value of our interest rate swaps compared to an unrealized gain of $4.2 million for the three fiscal quarters ended October 1, 2022.

Loss on Extinguishment of Debt

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.

Loss on extinguishment of debt was $3.5 million for the three fiscal quarters ended October 1, 2022, related to our debt refinancing completed in February 2022.

Other Expense, Net

Other expense, net was $0.2 million for the three fiscal quarters ended September 30, 2023, compared to $1.6 million for the three fiscal quarters ended October 1, 2022.

The $1.4 million decrease in other expense 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 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.

Earnings from our equity method investment in Premier Pools & Spa were $2.5 million for the three fiscal quarters ended September 30, 2023, compared to $2.6 million for the three fiscal quarters ended October 1, 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.

Income tax expense was $8.6 million for the three fiscal quarters ended September 30, 2023, compared to income tax expense of $25.4 million for the three fiscal quarters ended October 1, 2022.

Our effective tax rate was 140.7% for the three fiscal quarters ended September 30, 2023, compared to 65.6% for the three fiscal quarters ended October 1, 2022.

The difference between the U.S.

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.

Net loss was $2.5 million for the three fiscal quarters ended September 30, 2023, compared to $13.3 million of net income for the three fiscal quarters ended October 1, 2022.

The $15.8 million, or 118.7%, increase in net loss was primarily 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.

Net loss margin was 0.5% for the three fiscal quarters ended September 30, 2023, compared to net income margin of 2.3% for the three fiscal quarters ended October 1, 2022.

The 2.8% increase in net loss margin was driven by a $15.8 million increase in net loss and a $112.2 million decrease in net sales, compared to the three fiscal quarters ended October 1, 2022 because of the factors described above.

Adjusted EBITDA

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.

Adjusted EBITDA was $78.1 million for the three fiscal quarters ended September 30, 2023, compared to $138.9 million for the three fiscal quarters ended October 1, 2022.

The $60.8 million, or 43.7%, 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 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.

Adjusted EBITDA margin was 16.4% for the three fiscal quarters ended September 30, 2023, compared to 23.6% for the three fiscal quarters ended October 1, 2022.

The 7.2% decrease in Adjusted EBITDA margin was primarily because of a $60.8 million decrease in Adjusted EBITDA and a $112.2 million decrease in net sales, compared to the three fiscal quarters ended October 1, 2022, which were impacted by the other factors described above.

Non-GAAP Financial Measures

2 unchanged sentences

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.

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 and our Board of Directors 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.

18 unchanged sentences

Fiscal Quarter Ended

Two Fiscal Quarters Ended

Three Fiscal Quarters Ended

September 30, 2023

October 1, 2022

September 30, 2023

October 1, 2022

(dollars in thousands)

6 unchanged sentences

Stock-based compensation expense (b)

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

Unrealized losses on foreign currency transactions (c)

Strategic initiative costs (d)

6 unchanged sentences

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 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.

(a) Represents costs related to a cost reduction plan that includes severance and other costs for our executive management changes and additional costs related to our cost reduction plan announced in 2023, which includes further actions to reduce our manufacturing overhead by reducing headcount in addition to facility shutdowns.

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

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

8 unchanged sentences

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 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.

As of September 30, 2023, we had $78.1 million of cash, $301.6 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.

19 unchanged sentences

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 commitment fee is due and payable quarterly in arrears, and initially was 0.375% per annum and thereafter accrues 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.

1 unchanged sentence

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

As of September 30, 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.

4 unchanged sentences

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

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.

As of September 30, 2023, we had $301.6 million of outstanding borrowings under the Term Loan.

As of September 30, 2023, we were in compliance with all covenants under the Revolving Credit Facility and the Term Loan.

Share Repurchase Program

2 unchanged sentences

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.

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.

We did not repurchase any shares of our common stock during the fiscal quarter ended September 30, 2023.

As of September 30, 2023, $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:

Two Fiscal Quarters Ended

Three Fiscal Quarters Ended

September 30, 2023

October 1, 2022

(in thousands)

Net cash provided by (used in) operating activities

Net cash provided by operating activities

Net cash used in investing activities

3 unchanged sentences

Operating Activities

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

During the three fiscal quarters ended September 30, 2023, operating activities provided $88.1 million of cash.

Net loss, after adjustments for non-cash items, provided cash of $56.0 million.

Cash provided by operating activities was further driven by changes in our operating assets and liabilities, which provided $32.1 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.

Net cash provided by changes in our operating assets and liabilities for the three fiscal quarters ended September 30, 2023 consisted primarily of a $61.7 million decrease in inventories, a $3.0 million increase in other long-term liabilities and a $2.1 million increase in accounts payable partially offset by a $28.7 million increase in trade receivables, a $4.3 million increase in other assets, a $1.5 million increase in income tax receivable, a $0.3 million increase in prepaid expenses and other current assets and a $0.2 million decrease in accrued expenses and other current 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 two fiscal quarters ended July 2, 2022, operating activities used $15.1 million of cash.

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

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

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

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

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

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

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

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

Investing Activities

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.

During the three fiscal quarters ended September 30, 2023, investing activities used $28.3 million of cash, consisting of purchases of property and equipment for $28.3 million.

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

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.

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.

Financing Activities

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.

During the three fiscal quarters ended September 30, 2023, financing activities used $12.9 million of cash, primarily consisting of repayments on revolving credit facilities of $48.0 million, repayments on long-term debt borrowings of $12.4 million, and repayments of finance lease obligations of $0.4 million, partially offset by borrowings on revolving credit facilities of $48.0 million.

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.

Contractual Obligations

There have been no material changes, outside of the ordinary course of business, to our contractual obligations during the two fiscal quarters ended July 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 three fiscal quarters ended September 30, 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

1 unchanged sentence

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 and our Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2023.

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

1 unchanged sentence

Actual results may differ from estimates.

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.

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 result of the qualitative assessment performed for our one reporting unit, we determined that goodwill was not impaired at October 2, 2022.

As a result of a decline in our stock price, we plan to perform a quantitative assessment for our 2023

annual test as of October 1, 2023, which may result in a non-cash impairment charge during the fiscal quarter ended December 31, 2023.

Recently Issued and Adopted Accounting Pronouncements

1 unchanged sentence

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