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Item 2. Management’s Discussion and Analysis

2024-05-08 compared with 2023-11-07 · 124 added, 207 removed, 165 unchanged (67% of the section changed)

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 2023 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 13, 2024 (the “Annual Report”).

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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.

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, the implementation of our digital transformation and lean manufacturing activities, 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.

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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.

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

New emerging risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business, financial condition, results of operations and cash flows.

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

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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.

Our forward-looking statements further 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.

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.

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.

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.

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

Highlights for the fiscal quarter ended March 30, 2024

● Decrease in net sales of 19.7%, or $27.1 million, to $110.6 million for the fiscal quarter ended March 30, 2024, compared to $137.7 million for the fiscal quarter ended April 1, 2023.

● Decrease in net loss of $6.5 million to $7.9 million and representing a 7.1% net loss margin for the fiscal quarter ended March 30, 2024, compared to net loss of $14.4 million for the fiscal quarter ended April 1, 2023.

● Increase in Adjusted EBITDA (as defined below) of $1.3 million to $12.3 million for the fiscal quarter ended March 30, 2024, compared to $11.0 million for the fiscal quarter ended April 1, 2023.

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.

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.

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 the first quarter of 2024, mainly driven by lower packaged pool demand.

Fiberglass products continue to show strength relative to packaged pools.

We continue to make progress executing our strategy to drive adoption and awareness of fiberglass pools and automatic safety covers and gain additional operating efficiencies through value engineering and lean manufacturing initiatives .

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.

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

We expect to realize an additional $4.8 million of annualized savings during 2024 from plans initiated in the second and third quarters of 2023, with $2.7 million realized in the first quarter and the remainder expected to be realized in the second quarter.

Key Performance Indicators

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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.

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 (dealer in one-step distribution channel or distributor in two-step distribution channel), 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.

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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.

Our gross profit is primarily 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.

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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.

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.

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) the Odessa fire and other such unusual events and (xi) 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.

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

Results of Operations

Fiscal Quarter Ended 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 March 30, 2024 Compared to Fiscal Quarter Ended April 1, 2023

The following table summarizes our results of operations for the fiscal quarter ended March 30, 2024 and April 1, 2023 (dollars in thousands):

Fiscal Quarter Ended

September 30, 2023

October 1, 2022

(dollars in thousands)

Cost of sales

Selling, general, and administrative expense

Income from operations

Other expense:

Interest expense, net

Loss on extinguishment of debt

Other expense, net

Total other expense, net

Earnings from equity method investment

Income before income taxes

Income tax expense

Adjusted EBITDA (a)

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

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

Net sales were $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 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.

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 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.

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

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

Three Fiscal Quarters Ended

September 30, 2023

October 1, 2022

March 30, 2024

April 1, 2023

(dollars in thousands)

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Selling, general, and administrative expense

Underwriting fees related to offering of common stock

Income from operations

Loss from operations

Other expense:

Interest expense, net

Loss on extinguishment of debt

Other expense, net

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Earnings from equity method investment

Income before income taxes

Income tax expense

Net (loss) income

Loss before income taxes

Income tax expense (benefit)

Adjusted EBITDA (a)

(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 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.

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

Net sales were $110.6 million for the fiscal quarter ended March 30, 2024, compared to $137.7 million for the fiscal quarter ended April 1, 2023.

The $27.1 million, or 19.7%, decrease in net sales was due to a $25.8 million decrease in sales volume and a $1.3 million decrease from lower pricing.

The sales volume decrease was primarily driven by continued difficult economic conditions, lower backlog entering the year and normalized seasonality.

The decrease in total net sales of $27.1 million across our product lines consisted of $18.8 million for in-ground swimming pools, $5.9 million for pool covers and $2.4 million for pool liners.

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.

Cost of sales was $80.0 million for the fiscal quarter ended March 30, 2024, compared to $104.3 million for the fiscal quarter ended April 1, 2023.

The $24.3 million, or 23.3%, decrease in cost of sales was primarily the result of the decrease in fixed cost leverage and sales volume and a $0.4 million decrease in non-cash stock-based compensation expense.

Gross margin increased by 3.5%, to 27.7% of net sales for the fiscal quarter ended March 30, 2024, compared to 24.2% of net sales for the fiscal quarter ended April 1, 2023.

The 3.5% increase in gross margin was primarily driven by our improved cost structure, increased productivity associated with ongoing lean and value engineering efforts and lower material costs.

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 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.

Selling, general, and administrative expense was $26.3 million for the fiscal quarter ended March 30, 2024, compared to $33.1 million for the fiscal quarter ended April 1, 2023, and decreased as a percentage of net sales by 0.2%.

The $6.8 million, or 20.6%, decrease in selling, general, and administrative expense was primarily driven by a $5.1 million decrease in non-cash stock-based compensation expense, lower headcount and reduced expenses.

Amortization was $6.4 million for the fiscal quarter ended March 30, 2024, compared to $6.6 million for the fiscal quarter ended April 1, 2023.

The $0.2 million, or 3.3%, decrease in amortization was driven by certain definite-lived intangible assets becoming fully amortized during the fiscal year ended December 31, 2023.

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.

Interest expense, net was $5.0 million for the fiscal quarter ended March 30, 2024, compared to $10.8 million for the fiscal quarter ended April 1, 2023.

The $5.8 million, or 53.9%, decrease in interest expense, net was primarily the result of the change in the fair value of our interest rate swap, compared to the fiscal quarter ended April 1, 2023, partially offset by a higher effective interest rate on lower total borrowings.

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.

Other expense, net was $1.6 million for the fiscal quarter ended March 30, 2024, compared to $0.2 million for fiscal quarter ended April 1, 2023.

The $1.4 million increase in other expense was primarily driven by an unfavorable change in net foreign currency transaction gains and losses associated with our international subsidiaries.

Earnings from Equity Method Investment

Earnings from our equity method investment in Premier Pools & Spa were $2.5 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.

Earnings from our equity method investment in Premier Pools & Spa were $1.3 million for the fiscal quarter ended March 30, 2024, compared to less than $0.1 million for the fiscal quarter ended April 1, 2023, because of the financial performance of Premier Pools & Spa.

Income Tax Expense (Benefit)

Income tax expense was $0.5 million for the fiscal quarter ended March 30, 2024, compared to income tax benefit of $(2.9) million for the fiscal quarter ended April 1, 2023.

Our effective tax rate was (7.2)% for the fiscal quarter ended March 30, 2024, compared to 16.9% for the fiscal quarter ended April 1, 2023.

The difference between the U.S.

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.

federal statutory income tax rate and our effective income tax rate for both the fiscal quarters ended March 30, 2024 and April 1, 2023 was primarily attributable to the discrete impact of stock-based compensation expense and foreign income.

Net loss was $7.9 million for the fiscal quarter ended March 30, 2024, compared to $14.4 million for the fiscal quarter ended April 1, 2023.

The $6.5 million, or 45.3%, decrease in net loss was primarily because of the factors described above.

Net Loss Margin

Net loss margin was 7.1% for the fiscal quarter ended March 30, 2024, compared to 10.4% for the fiscal quarter ended April 1, 2023.

The 3.3% decrease in net loss margin was driven by a $6.5 million decrease in net loss, compared to the fiscal quarter ended April 1, 2023 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 was $12.3 million for the fiscal quarter ended March 30, 2024, compared to $11.0 million for the fiscal quarter ended April 1, 2023.

The $1.3 million, or 11.4%, increase in Adjusted EBITDA was primarily because of the increase in gross margin and the reduction in selling, general and administrative expenses, partially offset by 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.

Adjusted EBITDA margin was 11.1% for the fiscal quarter ended March 30, 2024, compared to 8.0% for the fiscal quarter ended April 1, 2023.

The 3.1% increase in Adjusted EBITDA margin was primarily because of a $1.3 million increase in Adjusted EBITDA and a $27.1 million decrease in net sales, compared to the fiscal quarter ended April 1, 2023, which were impacted by the factors described above.

Non-GAAP Financial Measures

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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.

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 incentive compensation plans, and to compare our performance against that of other companies using similar measures.

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● 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 the interest expense, or the amounts necessary to service interest or principal payments, on our outstanding debt;

● do not reflect income tax (benefit) expense, and because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and ability to operate;

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

The following table provides a reconciliation of our net 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:

Fiscal Quarter Ended

Three Fiscal Quarters Ended

September 30, 2023

October 1, 2022

September 30, 2023

October 1, 2022

March 30, 2024

April 1, 2023

(dollars in thousands)

Net income (loss)

Depreciation and amortization

Interest expense, net

Income tax expense

Income tax expense (benefit)

Loss on sale and disposal of property and equipment

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Acquisition and integration related costs (e)

Loss on extinguishment of debt (f)

Underwriting fees related to offering of common stock (g)

Odessa fire (h)

Odessa fire (f)

Adjusted EBITDA

Net income (loss) margin

Net loss margin

Adjusted EBITDA margin

(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.

(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 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.

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

(e) Represents acquisition and integration costs as well as other costs related to potential transactions.

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

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

(i) fees paid to external advisors for various matters and (ii) other items.

Liquidity and Capital Resources

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

As of 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.

As of March 30, 2024, we had $43.8 million of cash, $282.8 million of outstanding indebtedness 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.

Our capital expenditures are primarily related to investments in lean manufacturing and value engineering, including production capacity, diversifying our product offerings, storage, and delivery equipment.

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

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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.

As of March 30, 2024, we were in compliance with all covenants under the Revolving Credit Facility and the Term Loan.

Revolving Credit Facility

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

As of September 30, 2023, we had no outstanding borrowings under the Revolving Credit Facility and $75.0 million was available for future borrowing.

As of March 30, 2024, we had no outstanding borrowings under the Revolving Credit Facility and $75.0 million was available for future borrowing.

The Term Loan matures on February 23, 2029.

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

As of 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.

As of March 30, 2024, we had $282.8 million of outstanding borrowings under 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.

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 by May 2025.

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.

We did not repurchase any shares of our common stock during the fiscal quarter ended March 30, 2024.

As of March 30, 2024, $77.0 million remained available for share repurchases pursuant to our Repurchase Program.

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

Three Fiscal Quarters Ended

September 30, 2023

October 1, 2022

Fiscal Quarter Ended

March 30, 2024

April 1, 2023

(in thousands)

Net cash provided by operating activities

Net cash used in operating activities

Net cash used in investing activities

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Effect of exchange rate changes on cash

Net increase (decrease) in cash

Net (decrease) increase in cash

Operating Activities

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

During the fiscal quarter ended March 30, 2024, operating activities used $34.5 million of cash.

Net loss, after adjustments for non-cash items, provided cash of $6.8 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.

Cash used in operating activities was driven by changes in our operating assets and liabilities of $41.3 million.

Net cash used by changes in our operating assets and liabilities for the fiscal quarter ended March 30, 2024 consisted primarily of a $44.9 million increase in trade receivables, a $6.0 million decrease in accrued expenses and other current liabilities, a $0.4 million increase in income tax receivable, a $0.2 million decrease in other long-term liabilities and a $0.1 million increase in other assets, partially offset by a $8.2 million increase in accounts payable, a $1.6 million decrease in inventories and a $0.5 million decrease in prepaid expenses and other current assets.

The change in trade receivables was primarily driven by the timing of net sales.

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

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

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

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

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

payable, and a $0.7 million increase in other long-term liabilities.

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

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

During the 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.

During the fiscal quarter ended March 30, 2024, investing activities used $5.3 million of cash, consisting of purchases of property and equipment for $5.3 million.

The purchase of property and equipment was primarily to expand capacity for production and diversify offerings, especially for fiberglass pools, the majority of which relates to finishing up carryover projects from the prior year.

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

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

During the 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.

During the three fiscal quarters ended October 1, 2022, financing activities provided $12.6 million of cash, primarily consisting of proceeds from long-term debt borrowings in connection with the Refinancing of $320.1 million, proceeds from the sale of common stock of $257.7 million and borrowings on revolving credit facilities of $25.0 million, partially offset by repayments on long-term debt borrowings of $285.6 million, the repurchase and retirement of common stock of $272.7 million, repayments on revolving credit facility borrowings of $25.0 million, and deferred financing fees paid of $6.9 million.

During the fiscal quarter ended March 30, 2024, financing activities used $19.0 million of cash, primarily consisting of repayments on long-term debt borrowings of $18.8 million and repayments of finance lease obligations of $0.2 million.

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

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.

There have been no material changes, outside of the ordinary course of business, to our contractual obligations during the fiscal quarter ended March 30, 2024 from those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” in our Annual Report.

Critical Accounting Policies and Estimates

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

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

Our critical accounting policies and estimates are described below and under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report and Note 2 to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

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

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Actual results may differ from estimates.

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

Impairment of Goodwill

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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.

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.

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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 maximum goodwill impairment is the carrying value of the goodwill.

The qualitative factors we assessed as part of our annual impairment testing included economic conditions, industry and market considerations, cost factors, overall financial performance, and other entity specific events.

In addition, we considered our market capitalization based on quoted market prices of our securities on the Nasdaq Global Select Market, adjusted for the effect of a control premium as contemplated by ASC 350.

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

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

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

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.

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.

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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis