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Item 7. Management’s Discussion and Analysis

2024-03-13 compared with 2023-03-07 · 138 added, 160 removed, 304 unchanged (50% of the section changed)

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

We hold the #1 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 .

We hold the leading position in North America in every product category in which we compete.

It is our view 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.

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.

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

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

We support our dealer network with business development tools, co-branded marketing programs, and in-house training, as well as an operations platform consisting of approximately 1,800 employees across approximately 24 locations.

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

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

Net income does not adhere to this trend.

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

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Highlights for the year ended December 31, 2023

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

● Decrease in net sales of 18.6%, or $129.2 million, to $566.5 million for the year ended December 31, 2023, compared to $695.7 million for the year ended December 31, 2022.

● Decrease in net loss of $3.3 million, to $2.4 million for the year ended December 31, 2023, compared to a net loss of $5.7 million for the year ended December 31, 2022, representing a 0.4% net loss margin for the year ended December 31, 2023.

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

● Decrease in Adjusted EBITDA (as defined below) of $55.3 million, to $88.0 million for the year ended December 31, 2023, compared to $143.3 million for the year ended December 31, 2022.

Business Update

Market conditions continue to evolve.

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

new in-ground pool installations in 2022.

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

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

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

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

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

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

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

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

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

The remaining costs under the plan of approximately $0.5 million are expected to be incurred and recognized in 2023.

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

Leadership Transition

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

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

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

On March 18, 2023, Mr.

Borseth will become the Interim Chief Financial Officer.

A search for a permanent Chief Financial Officer is underway.

Ongoing macroeconomic challenges have impacted and are expected to continue to impact consumer spending and demand.

As anticipated, this resulted 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 such as our recent multi-year capital plan to invest in our facilities.

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

We are in the middle of our digital transformation effort to upgrade all of our technology and enterprise resource planning systems.

We have responded to economic uncertainty by implementing cost reduction programs and lean manufacturing initiatives that structurally reduce our cost basis.

In the fourth quarter of 2022, we approved a plan to realize $13.0 million of savings during 2023.

During the second and third quarters of 2023, we initiated additional plans and we expect to realize an additional $11.3 million of annualized savings from the plans implemented in 2023, with $6.5 million realized this year and therefore a total of $19.5 million of cost savings in 2023, with the remaining $4.8 million expected to be realized in 2024.

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.

On May 10, 2022, our Board of Directors approved a stock repurchase program (the “Repurchase Program”), which authorizes 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.

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

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

No shares were repurchased during the year ended December 31, 2023.

As of December 31, 2023, $77.0 million remained available under our Repurchase Program.

Key Factors Affecting our Performance

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● Material conversion:

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

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

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

From our perspective this will be a long-term trend toward material conversion from traditional concrete pools.

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

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

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

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

Our broad product offering allows dealers and distributors to offer consumers a wide variety of innovative pool shapes, depths, and lengths.

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Our use of innovative technology and premium materials result in long-lasting products that not only require lower up-front costs, but also save homeowners time and money from continuous maintenance throughout the product lifecycle.

We believe that new products will enhance our ability to compete with traditional materials at a variety of price points, and we expect to continue to devote significant resources to developing innovative new products.

We expect that new products will enhance our ability to compete with traditional materials at a variety of price points, and that we will continue to devote significant resources to developing innovative new products.

The volume of our products sold during a given period will depend in part on our successfully introducing new products that generate additional demand, as well as the extent to which new products may impact our sales of existing products.

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

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

would result in purchases of our products.

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

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Cost and Availability of Materials

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

Raw material costs, including costs of polyvinyl chloride (“PVC”) plastic, galvanized steel, fiberglass, aluminum, various resins, high impact polystyrene, gelcoat and polypropylene fabric, represent a majority of our cost of sales.

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

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

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

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

Prices for spot market purchases are negotiated on a continuous basis in line with current market prices.

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Acquisitions and Partnerships

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

The acquisition expanded our liner and safety cover product offerings.

On November 24, 2021, we acquired Radiant Pools, a manufacturer of vinyl-lined and aluminum-walled swimming pools.

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

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

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

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

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

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

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The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed has been recorded as goodwill.

On October 30, 2020, we entered into a long-term strategic partnership with and acquired a 28% equity interest in Premier Pools & Spas, a pool builder focusing on in-ground swimming pools.

In August 2021, we sold a portion of our interest in Premier Pools & Spas, retaining a post-sale ownership interest of 20.1%.

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

Our ownership interest in Premier Pools & Spas after the

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

On October 30, 2020, we entered into a long-term strategic partnership with and acquired a minority interest in Premier Pools & Spas, a pool builder focusing on in-ground swimming pools.

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

Products are sold directly to the franchisees, third parties independent of Premier Pools and Spas, and are therefore not considered related party transactions.

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

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

Our investment in Premier Pools & Spas is reflected as an equity method investment on our consolidated balance sheet as of December 31, 2023 and 2022, and our proportionate share of earnings or losses of Premier Pools & Spas is recognized in earnings (losses) from equity method investment in our consolidated statement of operations on a three-month lag.

Key Performance Indicators

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

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

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.

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.

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

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

Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and should not be considered as alternatives to net income (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.

We believe Adjusted EBITDA and Adjusted EBITDA margin are useful measurements for investors as they help identify underlying trends that could otherwise be masked by certain expenses that we do not consider indicative of our ongoing operating performance.

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Underwriting fees related to offering of common stock

Income (loss) from operations

Income from operations

Other expense (income):

Interest expense

Interest expense, net

Loss on extinguishment of debt

Other expense (income), net

Total other expense (income), net

Other (income) expense, net

Total other expense, net

Earnings from equity method investment

Income (loss) before income taxes

Income tax expense

(Loss) income before income taxes

Income tax (benefit) expense

Adjusted EBITDA

Net sales was $566.5 million for the year ended December 31, 2023, compared to $695.7 million for the year ended December 31, 2022.

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

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

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

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

The $129.2 million, or 18.6%, decrease in net sales was driven by a $143.0 million decrease from volume, partially offset by a $13.8 million increase from pricing.

The $143.0 million volume decrease was largely driven by the decrease in new in-ground pool starts and continued destocking of inventory in the wholesale distribution channel.

The $13.8 million pricing increase reflects the impact of pricing actions to address inflation.

The decrease in total net sales across our product lines was $87.6 million for in-ground swimming pools, $17.5 million for covers and $24.0 million for liners.

Cost of Sales and Gross Margin

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Gross margin decreased by 4.1% to 27.0% for the year ended December 31, 2023, compared to 31.1% for the year ended December 31, 2022.

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

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

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

The $65.8 million, or 13.7%, decrease in cost of sales was primarily the result of a decrease in sales volume.

The 4.1% decrease in gross margin was primarily driven by lower utilization, partially offset by lower total fixed costs and modest material cost deflation.

Selling, General, and Administrative Expense

Selling, general, and administrative expense was $110.3 million for the year ended December 31, 2023, compared to $146.8 million for the year ended December 31, 2022, and decreased as a percentage of net sales by 1.6%.

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

The $36.5 million, or 24.9%, decrease in selling, general, and administrative expense was primarily driven by $28.1 million decrease in non-cash stock-based compensation expense as well as lower wages by $4.3 million due to lower headcount, lower third-party spend by $2.4 million and lower incentives by $1.2 million.

Underwriting Fees Related to Offering of Common Stock

Underwriting fees related to our offering of common stock completed in January 2022 were $11.4 million for the year ended December 31, 2022.

Amortization was $26.5 million for the year ended December 31, 2023, compared to $28.2 million for the year ended December 31, 2022.

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

Interest Expense

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

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

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

Other Expense (Income), Net

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

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

The $1.7 million, or 5.9%, decrease in amortization was driven by certain definite-lived intangible assets becoming fully amortized during the year ended December 31, 2022.

Interest Expense, Net

Interest expense, net was $30.9 million for the year ended December 31, 2023, compared to $15.8 million for the year ended December 31, 2022.

The $15.1 million, or 96.3%, increase in interest expense was primarily the result of the change in the fair value of our interest rate swaps and a higher effective interest rate, compared to the year ended December 31, 2022.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was $3.5 million for the year ended December 31, 2022, related to our debt refinancing completed in February 2022.

Other (Income) Expense, Net

Other (income) expense, net was ($1.0) million for the year ended December 31, 2023, compared to $1.3 million for the year ended December 31, 2022.

The ($2.3) million increase in other (income) expense, net was primarily driven by a favorable change in net foreign currency transaction gains and losses associated with our international subsidiaries.

Earnings from Equity Method Investments

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

Income Tax Expense

Income tax expense was $19.4 million for the year ended December 31, 2022, compared to $8.8 million for the year ended December 31, 2021.

Earnings from equity method investment of Premier Pools & Spa was $3.7 million for the year ended December 31, 2023, compared to $4.2 million for the year ended December 31, 2022, primarily because of the financial performance of Premier Pools & Spa.

Income Tax (Benefit) Expense

Income tax benefit was ($7.7) million for the year ended December 31, 2023, compared to $19.4 million income tax expense for the year ended December 31, 2022.

Our effective tax rate was 76.3% for the year ended December 31, 2023, compared to 141.5% for the year ended December 31, 2022.

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

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

The income tax benefit of ($7.7) million for the year ended December 31, 2023 was primarily because of a $10.3 million benefit related to the release of uncertain tax positions and a $2.1 million benefit related to foreign tax restructuring, partially offset by a $3.1 million expense related to a change in valuation allowance and a $2.4 million expense related to non-deductible stock compensation.

For the year ended December 31, 2022, the effective tax rate differed from the statutory tax rate primarily due to non-deductible stock compensation of $9.2 million.

Net loss was $2.4 million for the year ended December 31, 2023, compared to $5.7 million of net loss for the year ended December 31, 2022.

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Net loss margin was 0.4% for the year ended December 31, 2023, compared to net loss margin of 0.8% for the year ended December 31, 2022.

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

The 0.4% decrease in net loss margin was driven by a $3.3 million decrease in net loss and a $129.2 million decrease in net sales, compared to the year ended December 31, 2022 because of the factors described above.

Adjusted EBITDA

Adjusted EBITDA was $88.0 million for the year ended December 31, 2023, compared to $143.3 million for the year ended December 31, 2022.

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

The $55.3 million, or 38.6%, decrease in Adjusted EBITDA was primarily because of the decrease in net sales.

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

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Adjusted EBITDA margin was 15.5% for the year ended December 31, 2023, compared to 20.6% for the year ended December 31, 2022.

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

The 5.1% decrease in Adjusted EBITDA margin was primarily because of a $55.3 million decrease in Adjusted EBITDA and a $129.2 million decrease in net sales, compared to the year ended December 31, 2022, driven by the factors detailed above.

Year ended December 31, 2022 Compared to Year ended December 31, 2021

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Selling, general, and administrative expense

(Loss) income from operations

Underwriting fees related to offering of common stock

Income (loss) from operations

Other expense (income):

Interest expense

Other (income) expense, net

Total other expense (income), net

Loss on extinguishment of debt

Other expense (income), net

Total other expense, net

Earnings from equity method investment

(Loss) income before income taxes

Income (loss) before income taxes

Income tax expense

Net (loss) income

Adjusted EBITDA

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

For discussion on comparison of the years ended December 31, 2022 and 2021, see the Results of Operations section disclosed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 7, 2023.

Non-GAAP Financial Measures

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The following discussion includes the presentation of Adjusted EBITDA and Adjusted EBITDA margin, which are non-GAAP financial measures that exclude the impact of certain costs, losses and gains that are required to be included in our profit and loss measures under GAAP.

Although we believe these measures are useful to investors and analysts for the same reasons it is useful to management, as discussed below, these measures are neither a substitute for, nor superior to, U.S.

Although it is our view these measures are useful to investors and analysts for the same reasons it is useful to management, as discussed below, these measures are neither a substitute for, nor superior to, U.S.

GAAP financial measures or disclosures.

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

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

We have presented Adjusted EBITDA and

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

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

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

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

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

Year Ended December 31,

(in thousands)

Net (loss) income

Depreciation and amortization

Interest expense

Income tax expense

Interest expense, net

Income tax (benefit) expense

Loss on sale and disposal of property and equipment

Restructuring charges (a)

Stock-based compensation expense

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

Strategic initiative costs (c)

Acquisition and integration related costs (d)

Loss on extinguishment of debt (e)

Underwriting fees related to offering of common stock (f)

Odessa fire (g)

IPO costs (h)

Stock-based compensation expense (b)

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

Strategic initiative costs (d)

Acquisition and integration related costs (e)

Loss on extinguishment of debt (f)

Underwriting fees related to offering of common stock (g)

Odessa fire (h)

IPO costs (i)

Adjusted EBITDA

Net (loss) income margin

Net loss margin

Adjusted EBITDA margin

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

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

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

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

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

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

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

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

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

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

(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 plans, which include 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 and other expenses for our strategic initiatives

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

(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 related to a production facility fire in Odessa, Texas.

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

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

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

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

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

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

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

We have completed our recent multi-year capital plan to invest in our facilities.

We are in the middle of our digital transformation effort to upgrade all of our technology and enterprise resource planning systems.

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

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

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

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

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

Prior Revolving Credit Facility

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

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

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

Prior Term Loan

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

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

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

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

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

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

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

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

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

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

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

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Net cash used in investing activities

Net cash provided by financing activities

Net cash (used in) provided by financing activities

Effect of exchange rate changes on cash

Net (decrease) increase in cash

Net increase (decrease) in cash

Operating Activities

During the year ended December 31, 2023, operating activities provided $116.4 million of cash.

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

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

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

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

Net loss, after adjustments for non-cash items, provided cash of $57.1 million.

Cash provided by operating activities was further driven by changes in our operating assets and liabilities, which provided $59.3 million.

Net cash provided in changes in our operating assets and liabilities for the year ended December 31, 2023 consisted primarily of a $68.2 million decrease in inventories, a $13.0 million decrease in trade receivables, a $2.8 million increase in other long-term liabilities and a $1.3 million decrease in income tax receivable, partially offset by a $11.9 million decrease in accrued expenses and other current liabilities, a $8.5 million decrease in accounts payable, a $4.3 million increase in other assets and a $1.3 million increase in prepaid expenses and other current assets.

The change in trade receivables was primarily driven by the amount and timing of net sales, and the decrease in inventories was primarily driven by a business decision to right size our inventory levels to better align with demand.

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

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

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

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

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

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

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

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

Investing Activities

During the year ended December 31, 2023, investing activities used $31.7 million of cash, primarily consisting of the purchase of property and equipment for $33.2 million partially offset by capital reimbursed from insurance

proceeds for $1.5 million.

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

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

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

During the year ended December 31, 2021, investing activities used $108.2 million of cash, primarily consisting of the acquisition of Radiant of $90.5 million, and the purchase of property and equipment for $25.0 million, partially offset by proceeds from the sale of equity method investment of $6.8 million and return of equity method investment of $0.4 million.

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

Financing Activities

During the year ended December 31, 2023, financing activities used $13.9 million of cash, primarily consisting of repayments on revolving credit facilities of $48.0 million, repayments on long-term debt borrowings of $13.2 million, and repayments of finance lease obligations of $0.6 million, partially offset by borrowings on revolving credit facilities of $48.0 million.

During the year ended December 31, 2022, financing activities provided $3.8 million of cash, primarily consisting of proceeds from long-term debt borrowings in connection with the debt refinancing of $320.1 million, proceeds from the sale of common stock of $257.7 million and borrowings on revolving credit facilities of $25.0 million, partially offset by repayments on long-term debt borrowings of $286.5 million, the repurchase and retirement of common stock of $280.7 million, repayments on revolving credit facility borrowings of $25.0 million, and deferred financing fees paid of $6.9 million.

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

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

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

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

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

For discussion on operating, investing, and financing activities of the year ended December 31, 2021, see the Liquidity and Capital Resources section disclosed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 7, 2023.

We are experiencing inflationary pressures in certain areas of our business, including with respect to prices of our raw materials and employee wages, although, to date, we have been able to offset such pressures, to some extent, through price increases and other measures.

We cannot, however, predict any future trends in the rate of inflation or associated increases in our operating costs and how that may impact our business.

There is a substantial risk that demand for our products may continue to soften as we continue to increase the prices of our products to offset the inflationary pressure.

Contractual Obligations

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

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

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

We evaluate these estimates on an ongoing basis.

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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 have selected the first day of the fourth 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.

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

We calculate the

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

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

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

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

Based on the results of the quantitative assessment performed for our one reporting unit, we determined that goodwill was not impaired at October 1, 2023.

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

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

For our quantitative impairment test performed for our reporting unit at October 1, 2023, we estimated the fair value of our reporting unit based on a market approach.

Under the market approach, we estimated the fair value of our single reporting unit based on enterprise value using our share price on the Nasdaq Global Select Market and an appropriate control premium.

The market approach utilizes consideration of control premium associated with cost synergies that arise from obtaining control over a reporting unit and guideline transactions.

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

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As a result, if we had used significantly different assumptions or estimates, the fair value of our stock-based compensation expense could have been materially different.

For stock options, restricted stock awards, and restricted stock units, stock-based compensation is recognized using a graded vesting method over the requisite service period in which employees earn the awards.

For stock options, restricted stock awards, restricted stock units and stock appreciation rights, stock-based compensation is recognized using a graded vesting method over the requisite service period in which employees earn the awards.

We account for forfeitures of stock-based awards as they occur rather than applying an estimated forfeiture rate to stock-based compensation expense.

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

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

As of December 31, 2023 and 2022, our valuation allowance was $3.1 million and $0.0 million, respectively.

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

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

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

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

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis