Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 7, 2023 (the “Annual Report”).
Cautionary Note Regarding Forward-Looking Statements
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, 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 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. We encourage you to read this report and our other filings with the SEC carefully. You also should be aware that these risk factors and other information may not described every risk that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may affect us. We operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. Although we believe that the expectations reflected in the forward-looking statements are reasonable and our expectations based on third-party information and projections are from sources that management believes to be reputable, we cannot guarantee future results, levels of activities, performance, or achievements.
These forward-looking statements reflect our views with respect to future events as of the date of this Quarterly Report on Form 10-Q or the date specified herein, and we have based these forward-looking statements on our current expectations and projections about future events and trends. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. Our forward-looking statements do not reflect the potential impact of any future acquisitions, merger, dispositions, joint ventures, or investments we may undertake. We qualify all of our forward-looking statements by these cautionary statements.
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Overview
We are the largest designer, manufacturer, and marketer of in-ground residential swimming pools in North America, Australia, and New Zealand. We hold the #1 position in North America in every product category in which we compete. We believe that we are the most sought-after brand in the pool industry and the only pool company that has established a direct relationship with the homeowner. We are Latham, The Pool Company TM .
With an operating history that spans over 65 years, we offer the industry’s broadest portfolio of pools and related products, including in-ground swimming pools, pool liners, and pool covers.
We have a heritage of innovation. In an industry that has traditionally marketed on a business-to-business basis (pool manufacturer to dealer), we pioneered the first “direct-to-homeowner” digital and social marketing strategy that has transformed the homeowner’s purchase journey. Through this marketing strategy, we are able to create demand for our pools and to provide high quality, purchase-ready consumer leads to our dealer partners.
Partnership with our dealers is integral to our collective success, and we have enjoyed long-tenured relationships averaging over 14 years. We support our dealer network with business development tools, co-branded marketing programs, and in-house training.
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.
We conduct our business as one operating and reportable segment that designs, manufactures, and markets in-ground swimming pools, liners, and covers.
Recent Developments
Highlights for the fiscal quarter ended 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.
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Business Update
Market conditions continue to evolve. 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 and we expect this to continue into 2024. 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 dealer strategy. 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 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 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. J. 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
Net Sales
We derive our revenue from the design, manufacture, and sale of in-ground swimming pools, pool covers, and pool liners. We sell fiberglass pools, which are one-piece manufactured fiberglass pools that are ready to be installed in a consumer’s backyard, and custom vinyl pools, which are manufactured pools that are made out of non-corrosive steel, aluminum, or composite polymer frame, on top of which a vinyl liner is installed. We sell liners for the interior surface of vinyl pools (including pools that were not manufactured by us). We also sell all-season covers, which are winterizing mesh or solid pool covers that protect pools against debris and cold or inclement weather, and automatic safety covers for pools that can be operated with a switch.
Our sales are made through one-step and two-step business-to-business distribution channels. In our one-step distribution channel, we sell our products directly to dealers who, in turn, sell our products to consumers. In our two-step distribution channel, we sell our products to distributors who warehouse our products and sell them on to dealers, who ultimately sell our products to consumers.
Each product shipped is considered to be one performance obligation. With the exception of our extended service warranties and our custom product contracts, we recognize our revenue when control of our promised goods is transferred to our customers, either upon shipment or arrival at our customer’s destination depending upon the terms of the purchase order. Sales are recognized net of any estimated rebates, returns, allowances, cash discounts, or other sales incentives. Revenue that is derived from our extended service warranties, which are separately priced and sold, is recognized over the term of the contracts. Revenue from custom products is recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation.
Gross Margin
Gross margin is gross profit as a percentage of our net sales. Gross margin depends upon several factors, such as the prices we charge buyers, changes in prices of raw materials, the volume and relative sales mix among product lines, and plant performance, among other factors. Gross margin is also impacted by the costs of distribution and occupancy costs, which can vary.
Our gross profit is variable in nature and generally follows changes in net sales. The components of our cost of sales may not be comparable to the components of cost of sales or similar measures of other companies. As a result, our gross profit and gross margin may not be comparable to similar data made available by other companies.
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Adjusted EBITDA and Adjusted EBITDA Margin
We use Adjusted EBITDA and Adjusted EBITDA margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to utilize as a significant performance metric in our annual management incentive bonus plan compensation and to compare our performance against that of other peer companies using similar measures. We define Adjusted EBITDA as net income (loss) plus (i) depreciation and amortization, (ii) interest expense, 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.
We define Adjusted EBITDA margin as Adjusted EBITDA divided by net sales. 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, 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 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
% of Net
% of Net
Change
Change in %
September 30, 2023
Sales
October 1, 2022
Sales
Amount
of Net Sales
(dollars in thousands)
Net sales
$
160,778
100.0
%
$
189,398
100.0
%
$
(28,620)
0.0
%
Cost of sales
112,633
70.1
%
130,521
68.9
%
(17,888)
1.2
%
Gross profit
48,145
29.9
%
58,877
31.1
%
(10,732)
(1.2)
%
Selling, general, and administrative expense
23,431
14.6
%
26,749
14.1
%
(3,318)
0.5
%
Amortization
6,635
4.1
%
7,156
3.8
%
(521)
0.3
%
Income from operations
18,079
11.2
%
24,972
13.2
%
(6,893)
(2.0)
%
Other expense:
Interest expense, net
5,980
3.7
%
4,264
2.3
%
1,716
1.4
%
Loss on extinguishment of debt
—
—
%
—
—
%
—
0.0
%
Other expense, net
1,031
0.7
%
1,052
0.5
%
(21)
0.2
%
Total other expense, net
7,011
4.4
%
5,316
2.8
%
1,695
1.6
%
Earnings from equity method investment
1,771
1.2
%
1,329
0.7
%
442
0.5
%
Income before income taxes
12,839
8.0
%
20,985
11.1
%
(8,146)
(3.1)
%
Income tax expense
6,686
4.2
%
9,109
4.8
%
(2,423)
(0.6)
%
Net income
$
6,153
3.8
%
$
11,876
6.3
%
$
(5,723)
(2.5)
%
Adjusted EBITDA (a)
$
36,083
22.4
%
$
42,252
22.3
%
$
(6,169)
0.1
%
________________________________________
(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.
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Net Sales
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 $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 $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 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 $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
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 $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 $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.
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Income Tax Expense
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 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
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 3.8% 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 $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 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.
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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
% of Net
% of Net
Change
Change in %
September 30, 2023
Sales
October 1, 2022
Sales
Amount
of Net Sales
(dollars in thousands)
Net sales
$
475,625
100.0
%
$
587,812
100.0
%
$
(112,187)
0.0
%
Cost of sales
343,877
72.3
%
390,674
66.5
%
(46,797)
5.8
%
Gross profit
131,748
27.7
%
197,138
33.5
%
(65,390)
(5.8)
%
Selling, general, and administrative expense
86,697
18.2
%
113,778
19.4
%
(27,081)
(1.2)
%
Underwriting fees related to offering of common stock
—
—
%
11,437
1.8
%
(11,437)
(1.8)
%
Amortization
19,902
4.2
%
21,504
3.7
%
(1,602)
0.5
%
Income from operations
25,149
5.3
%
50,419
8.6
%
(25,270)
(3.3)
%
Other expense:
Interest expense, net
21,270
4.5
%
9,193
1.6
%
12,077
2.9
%
Loss on extinguishment of debt
—
—
%
3,465
0.6
%
(3,465)
(0.6)
%
Other expense, net
205
—
%
1,614
0.2
%
(1,409)
(0.2)
%
Total other expense, net
21,475
4.5
%
14,272
2.4
%
7,203
2.1
%
Earnings from equity method investment
2,468
0.5
%
2,591
0.4
%
(123)
0.1
%
Income before income taxes
6,142
1.3
%
38,738
6.6
%
(32,596)
(5.3)
%
Income tax expense
8,642
1.8
%
25,399
4.3
%
(16,757)
(2.5)
%
Net (loss) income
$
(2,500)
(0.5)
%
$
13,339
2.3
%
$
(15,839)
(2.8)
%
Adjusted EBITDA (a)
$
78,115
16.4
%
$
138,867
23.6
%
$
(60,752)
(7.2)
%
(a) Adjusted EBITDA is a non-GAAP measure. 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
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 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 $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 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.
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Selling, General, and Administrative Expense
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 three fiscal quarters ended October 1, 2022, related to the offering that was completed in January 2022.
Amortization
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 $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 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 $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 $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. 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.
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Net (Loss) Income
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 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 $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 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.
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Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA and Adjusted EBITDA margin are key metrics used by management and our Board of Directors to assess our financial performance. 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 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. 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. In evaluating Adjusted EBITDA and Adjusted EBITDA margin, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. There can be no assurance that we will not modify the presentation of Adjusted EBITDA and Adjusted EBITDA margin in the future, and any such modification may be material. Our presentation of Adjusted EBITDA and Adjusted EBITDA margin should not be construed to imply that our future results will be unaffected by any such adjustments. In addition, other companies, including companies in our industry, may not calculate Adjusted EBITDA and Adjusted EBITDA margin at all or may calculate Adjusted EBITDA and Adjusted EBITDA margin differently and accordingly, are not necessarily comparable to similarly entitled measures of other companies, which reduces the usefulness of Adjusted EBITDA and Adjusted EBITDA margin as tools for comparison.
Adjusted EBITDA and Adjusted EBITDA margin have their limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Adjusted EBITDA and Adjusted EBITDA margin:
● do not reflect every expenditure, future requirements for capital expenditures or contractual commitments;
● do not reflect changes in our working capital needs;
● 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;
● do not reflect non-cash stock-based compensation, which will remain a key element of our overall compensation package; and
● do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations.
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Although depreciation and amortization are eliminated in the calculation of Adjusted EBITDA and Adjusted EBITDA margin, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA and Adjusted EBITDA margin do not reflect any costs of such replacements.
Management compensates for these limitations by primarily relying on our GAAP results, while using Adjusted EBITDA and Adjusted EBITDA margin as supplements to the corresponding GAAP financial measures.
The following table provides a reconciliation of our net income (loss) to Adjusted EBITDA for the periods presented and the calculation of Adjusted EBITDA margin:
Fiscal Quarter Ended
Three Fiscal Quarters Ended
September 30, 2023
October 1, 2022
September 30, 2023
October 1, 2022
(dollars in thousands)
Net income (loss)
$
6,153
$
11,876
$
(2,500)
$
13,339
Depreciation and amortization
10,500
9,560
29,784
28,834
Interest expense, net
5,980
4,264
21,270
9,193
Income tax expense
6,686
9,109
8,642
25,399
Loss on sale and disposal of property and equipment
118
22
131
146
Restructuring charges (a)
1,818
287
2,615
406
Stock-based compensation expense (b)
2,354
7,061
14,887
40,415
Unrealized losses on foreign currency transactions (c)
1,400
1,103
932
2,817
Strategic initiative costs (d)
1,063
532
3,065
3,019
Acquisition and integration related costs (e)
—
—
11
257
Loss on extinguishment of debt (f)
—
—
—
3,465
Underwriting fees related to offering of common stock (g)
—
—
—
11,437
Odessa fire (h)
11
(1,523)
(760)
—
Other (i)
—
(39)
38
140
Adjusted EBITDA
$
36,083
$
42,252
$
78,115
$
138,867
Net sales
$
160,778
$
189,398
$
475,625
$
587,812
Net income (loss) margin
3.8
%
6.3
%
(0.5)
%
2.3
%
Adjusted EBITDA margin
22.4
%
22.3
%
16.4
%
23.6
%
(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.
(c) Represents unrealized foreign currency transaction losses associated with our international subsidiaries.
(d) Represents fees paid to external consultants for our strategic initiatives.
(e) Represents acquisition and integration costs primarily related to the acquisition of Radiant, the equity investment in Premier Pools & Spas, as well as other costs related to potential transactions.
(f) Represents the loss on extinguishment of debt in connection with our debt refinancing on February 23, 2022.
(g) Represents underwriting fees related to our offering of common stock that was completed in January 2022.
(h) Represents costs incurred and insurance recoveries in excess of costs incurred for the period related to a production facility fire in Odessa, Texas.
(i) Other costs consist of other discrete items as determined by management, primarily including (i) fees paid to external advisors for various matters, (ii) non-cash adjustments to record the step-up in the fair value of inventory related to the acquisition of Radiant, which was amortized through cost of sales in the condensed consolidated statements of operations, and (iii) other items.
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Liquidity and Capital Resources
Overview
Our primary sources of liquidity are net cash provided by operating activities and availability under our Revolving Credit Facility (as defined below). Historically, we have funded working capital requirements, capital expenditures, payments related to acquisitions, and debt service requirements with internally generated cash on hand, borrowings under our credit facilities, and the issuance of shares of our common stock. Our primary cash needs are to fund working capital, capital expenditures, debt service requirements, any acquisitions, or investments we may undertake, and any share repurchases we may make. As of 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. Our working capital requirements fluctuate during the fiscal year, driven primarily by seasonality and the timing of raw material purchases. Our capital expenditures are primarily related to growth, including production capacity, storage, and delivery equipment. We are in the midst of a multi-year capital plan to invest in our facilities, technology, and systems.
We believe that our existing cash, cash generated from operations and availability under our Revolving Credit Facility will be adequate to fund our operating expenses and capital expenditure requirements over the next 12 months, as well as our longer-term liquidity needs. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We may issue debt or equity securities, which may provide an additional source of liquidity. However, there can be no assurance equity or debt financing will be available to us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders.
Our Indebtedness
On February 23, 2022, Latham Pool Products, Inc. (“Latham Pool Products”), our wholly owned subsidiary, entered into an agreement (the “Credit Agreement”) with Barclays Bank PLC, which provides a senior secured multicurrency revolving line of credit in an initial principal amount of $75.0 million (the “Revolving Credit Facility”) and a U.S. Dollar senior secured term loan (the “Term Loan”) in an initial principal amount of $325.0 million (the “Refinancing”). On such date, proceeds under the 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
The Revolving Credit Facility may be utilized to finance ongoing general corporate and working capital needs and permits Latham Pools Products to borrow loans in U.S. Dollars, Canadian Dollars, Euros and Australian Dollars. The Revolving Credit Facility matures on February 23, 2027. Loans outstanding under the Revolving Credit Facility denominated in U.S. Dollars and Canadian Dollars bear interest, at the borrower’s option, at a rate per annum based on Term SOFR or CDO (each, as defined in the Credit Agreement), as applicable, plus a margin of 3.50%, or at a rate per annum based on the Base Rate or the Canadian Prime Rate (each, as defined in the Credit Agreement), plus a margin of 2.50%. Loans outstanding under the Revolving Credit Facility denominated in Euros or Australian Dollars bear interest based on EURIBOR or the AUD Rate (each, as defined in the Credit Agreement), respectively, plus a margin of 3.50%. A commitment fee accrues on any unused portion of the commitments under the Revolving Credit Facility. The commitment fee is due and payable quarterly in arrears, and 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.
We are also required to meet certain financial covenants, including maintaining specific liquidity measurements. There are also negative covenants, including certain restrictions on our ability 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 September 30, 2023, we had no outstanding borrowings under the Revolving Credit Facility and $75.0 million was available for future borrowing.
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Term Loan
The Term Loan matures on February 23, 2029. Loans outstanding under the Term Loan bear interest, at the borrower’s option, at a rate per annum based on Term SOFR (as defined in the Credit Agreement), plus a margin ranging from 3.75% to 4.00%, depending on the First Lien Net Leverage Ratio, or based on the Base Rate (as defined in the Credit Agreement), plus a margin ranging from 2.75% to 3.00%, depending on the First Lien Net Leverage Ratio. Loans under the Term Loan are subject to scheduled quarterly amortization payments equal to 0.25% of the initial principal amount of the Term Loan.
The obligations under the Credit Agreement are guaranteed by certain of our wholly owned subsidiaries as defined in the security agreement. The obligations under the Credit Agreement are secured by substantially all of the guarantors’ tangible and intangible assets, including, but not limited to, their accounts receivables, equipment, intellectual property, inventory, cash and cash equivalents, deposit accounts and security accounts. The Credit Agreement also restricts payments and other distributions unless certain conditions are met, which could restrict our ability to pay dividends.
As of 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
On May 10, 2022, we approved a stock repurchase program (the “Repurchase Program”), which authorized us to repurchase up to $100 million of our shares of common stock over the next three years. We may effect these repurchases in open market transactions, privately negotiated purchases or other acquisitions. We are not obligated to repurchase any of our outstanding shares under the Repurchase Program and the timing and amount of any repurchases will depend on market conditions, our stock price, alternative uses of capital, the terms of our debt instruments and other factors. 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.
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Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented:
Three Fiscal Quarters Ended
September 30, 2023
October 1, 2022
(in thousands)
Net cash provided by operating activities
$
88,123
$
5,236
Net cash used in investing activities
(28,273)
(29,362)
Net cash (used in) provided by financing activities
(12,874)
12,626
Effect of exchange rate changes on cash
(1,489)
(1,832)
Net increase (decrease) in cash
$
45,487
$
(13,332)
Operating Activities
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 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 three fiscal quarters ended October 1, 2022, operating activities provided $5.2 million of cash. Net income, after adjustments for non-cash items, provided cash of $105.4 million. Cash provided by operating activities was further driven by changes in our operating assets and liabilities, which used $100.1 million. Net cash used in changes in our operating assets and liabilities for the three fiscal quarters ended October 1, 2022 consisted primarily of a $44.9 million increase in trade receivables, a $59.1 million increase in inventories, a $2.1 million increase in income tax receivable, a $0.4 million increase in other assets 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 change in trade receivables was primarily due to the timing of, and increase in, net sales, and the increase in inventories was primarily due to a strategic decision to carry more inventory, as well as higher costs. The changes in accrued expenses and other current liabilities and accounts payable were primarily due to volume of purchases and timing of payments.
Investing Activities
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 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 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.
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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 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
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. 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. We evaluate these estimates on an ongoing basis. 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 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
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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
A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.