Latham Group, Inc. 10-Q

Item 2. 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”). Cautionary Note Regarding Forward-Looking Statements Certain statements in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this report other than statements of historical fact may constitute forward-looking statements, including statements regarding our future operating results and financial position, our business strategy and plans, business and market trends, our objectives for future operations, macroeconomic and geopolitical conditions, the implementation of our cost reduction plans and expected annualized cost savings, 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. These statements involve known and unknown risks, uncertainties, assumptions and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including those set forth under “Risk Factors,” “Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in the Annual Report and as described in other subsequent reports we file or furnish with the SEC, including elsewhere in this Quarterly Report on Form 10-Q. For similar reasons, our past results may not be a reliable indicator of future performance and trends. We encourage you to read this report and our other filings with the SEC carefully. You also should be aware that these risk factors and other information 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. Although we believe that the expectations reflected in the forward-looking statements are reasonable and our expectations based on third-party information and projections are from sources that management believes to be reputable, we cannot guarantee future results, levels of activities, performance, or achievements. These forward-looking statements reflect our views with respect to future events as of the date of this Quarterly Report on Form 10-Q or the date specified herein, and we have based these forward-looking statements on our current expectations and projections about future events and trends. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. Our forward-looking statements 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. 22 Table of Contents Overview We are the largest designer, manufacturer, and marketer of in-ground residential swimming pools in North America, Australia, and New Zealand. We hold the 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. We have a heritage of innovation. In an industry that has traditionally marketed on a business-to-business basis (pool manufacturer to dealer), we pioneered the first “direct-to-homeowner” digital and social marketing strategy that has transformed the homeowner’s purchase journey. Through this marketing strategy, we are able to create demand for our pools and to provide high quality, purchase-ready consumer leads to our dealer partners. Partnership with our dealers is integral to our collective success, and we have enjoyed long-tenured relationships averaging over 14 years. We support our dealer network with business development tools, co-branded marketing programs, and in-house training, 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 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. ​ ​ 23 Table of Contents Business Update ​ 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 Net Sales We derive our revenue from the design, manufacture, and sale of in-ground swimming pools, pool covers, and pool liners. We sell fiberglass pools, which are one-piece manufactured fiberglass pools that are ready to be installed in a consumer’s backyard, and custom vinyl pools, which are manufactured pools that are made out of non-corrosive steel, aluminum, or composite polymer frame, on top of which a vinyl liner is installed. We sell liners for the interior surface of vinyl pools (including pools that were not manufactured by us). We also sell all-season covers, which are winterizing mesh or solid pool covers that protect pools against debris and cold or inclement weather, and automatic safety covers for pools that can be operated with a switch. Our sales are made through one-step and two-step business-to-business distribution channels. In our one-step distribution channel, we sell our products directly to dealers who, in turn, sell our products to consumers. In our two-step distribution channel, we sell our products to distributors who warehouse our products and sell them on to dealers, who ultimately sell our products to consumers. Each product shipped is considered to be one performance obligation. With the exception of our extended service warranties and our custom product contracts, we recognize our revenue when control of our promised goods is transferred to our customers (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. Revenue that is derived from our extended service warranties, which are separately priced and sold, is recognized over the term of the contracts. Revenue from custom products is recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation. Gross Margin Gross margin is gross profit as a percentage of our net sales. Gross margin depends upon several factors, such as the prices we charge buyers, changes in prices of raw materials, the volume and relative sales mix among product lines, and plant performance, among other factors. Gross margin is also impacted by the costs of distribution and occupancy costs, which can vary. Our gross profit is 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. As a result, our gross profit and gross margin may not be comparable to similar data made available by other companies. Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA and Adjusted EBITDA margin are key metrics used by management and our Board of Directors to assess our financial performance. Adjusted EBITDA and Adjusted EBITDA margin are also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures. 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 24 Table of Contents 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. ​ ​ 25 Table of Contents Results of Operations 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 ​ ​ ​ ​ % of Net ​ ​ ​ % of Net ​ Change ​ Change in % ​ March 30, 2024 Sales April 1, 2023 Sales Amount of Net Sales ​ ​ (dollars in thousands) Net sales ​ $ 110,629 ​ 100.0 % $ 137,719 ​ 100.0 % $ (27,090) ​ 0.0 % Cost of sales ​ 80,040 72.3 % 104,349 75.8 % (24,309) (3.5) % Gross profit ​ 30,589 27.7 % 33,370 24.2 % (2,781) 3.5 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Selling, general, and administrative expense ​ 26,250 23.8 % 33,057 24.0 % (6,807) (0.2) % Amortization ​ 6,412 5.8 % 6,632 4.8 % (220) 1.0 % Loss from operations ​ (2,073) (1.9) % (6,319) (4.6) % 4,246 2.7 % Other expense: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest expense, net ​ 4,982 4.5 % 10,804 7.8 % (5,822) (3.3) % Other expense, net ​ 1,586 1.4 % 210 0.1 % 1,376 1.3 % Total other expense, net ​ 6,568 5.9 % 11,014 8.0 % (4,446) (2.0) % Earnings from equity method investment ​ 1,309 1.2 % 37 0.0 % 1,272 1.2 % Loss before income taxes ​ (7,332) (6.6) % (17,296) (12.6) % 9,964 6.0 % Income tax expense (benefit) ​ 532 0.5 % (2,928) (2.1) % 3,460 2.6 % Net loss ​ $ (7,864) (7.1) % $ (14,368) (10.4) % $ 6,504 3.3 % Adjusted EBITDA (a) ​ $ 12,293 11.1 % $ 11,033 8.0 % $ 1,260 3.1 % (a) Adjusted EBITDA is a non-GAAP measure. See “Non-GAAP Financial Measures” for a reconciliation to net loss, the most directly comparable GAAP measure, and for information regarding our use of Adjusted EBITDA. Net Sales 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 $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 $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. 26 Table of Contents Amortization 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 $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 $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 $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. 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 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 $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 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. 27 Table of Contents Non-GAAP Financial Measures Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA and Adjusted EBITDA margin are key metrics used by management and our Board of Directors to assess our financial performance. Adjusted EBITDA and Adjusted EBITDA margin are also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures. 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. 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. Adjusted EBITDA and Adjusted EBITDA margin have their limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Adjusted EBITDA and Adjusted EBITDA margin: ● do not reflect every expenditure, future requirements for capital expenditures or contractual commitments; ● do not reflect changes in our working capital needs; ● do not reflect the interest expense, or the amounts necessary to service interest or principal payments, on our outstanding debt; ● do not reflect income tax (benefit) expense, and because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and ability to operate; ● do not reflect non-cash stock-based compensation, which will remain a key element of our overall compensation package; and ● do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations. Although depreciation and amortization are eliminated in the calculation of Adjusted EBITDA and Adjusted EBITDA margin, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA and Adjusted EBITDA margin do not reflect any costs of such replacements. Management compensates for these limitations by primarily relying on our GAAP results, while using Adjusted EBITDA and Adjusted EBITDA margin as supplements to the corresponding GAAP financial measures. 28 Table of Contents 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 ​ ​ March 30, 2024 April 1, 2023 ​ (dollars in thousands) Net loss $ (7,864) ​ $ (14,368) ​ Depreciation and amortization ​ 10,375 ​ ​ 9,258 ​ Interest expense, net ​ 4,982 ​ ​ 10,804 ​ Income tax expense (benefit) ​ 532 ​ ​ (2,928) ​ Loss on sale and disposal of property and equipment ​ 12 ​ ​ 8 ​ Restructuring charges (a) ​ 318 ​ ​ 519 ​ Stock-based compensation expense (b) ​ 1,243 ​ ​ 6,769 ​ Unrealized losses on foreign currency transactions (c) ​ 1,584 ​ ​ 730 ​ Strategic initiative costs (d) ​ 1,123 ​ ​ 1,067 ​ Acquisition and integration related costs (e) ​ — ​ ​ 11 ​ Odessa fire (f) ​ — ​ ​ (864) ​ Other (g) ​ (12) ​ ​ 27 ​ Adjusted EBITDA $ 12,293 ​ $ 11,033 ​ Net sales $ 110,629 ​ $ 137,719 ​ Net loss margin (7.1) % (10.4) % Adjusted EBITDA margin 11.1 % 8.0 % (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. (c) Represents unrealized foreign currency transaction losses associated with our international subsidiaries. (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. ​ 29 Table of Contents Liquidity and Capital Resources Overview Our primary sources of liquidity are net cash provided by operating activities and availability under our Revolving Credit Facility (as defined below). Historically, we have funded working capital requirements, capital expenditures, payments related to acquisitions, and debt service requirements with internally generated cash on hand, borrowings under our credit facilities, and the issuance of shares of our common stock. Our primary cash needs are to fund working capital, capital expenditures, debt service requirements, any acquisitions or investments we may undertake, and any share repurchases we may make. As of 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 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. We believe that our existing cash, cash generated from operations and availability under our Revolving Credit Facility will be adequate to fund our operating expenses and capital expenditure requirements over the next 12 months, as well as our longer-term liquidity needs. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We may issue debt or equity securities, which may provide an additional source of liquidity. However, there can be no assurance equity or debt financing will be available to us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders. Our Indebtedness On February 23, 2022, Latham Pool Products, Inc. (“Latham Pool Products”), our wholly owned subsidiary, entered into an agreement (the “Credit Agreement”) with Barclays Bank PLC, which provides a senior secured multicurrency revolving line of credit in an initial principal amount of $75.0 million (the “Revolving Credit Facility”) and a U.S. Dollar senior secured term loan (the “Term Loan”) in an initial principal amount of $325.0 million (the “Refinancing”). On such date, proceeds under the Credit Agreement were used to repay and replace $294.0 million under, and terminate, the previous credit agreement and for general corporate purposes. As of March 30, 2024, we were in compliance with all covenants under the Revolving Credit Facility and the Term Loan. Revolving Credit Facility The Revolving Credit Facility may be utilized to finance ongoing general corporate and working capital needs and permits Latham Pools Products to borrow loans in U.S. Dollars, Canadian Dollars, Euros and Australian Dollars. The Revolving Credit Facility matures on February 23, 2027. Loans outstanding under the Revolving Credit Facility denominated in U.S. Dollars and Canadian Dollars bear interest, at the borrower’s option, at a rate per annum based on Term SOFR or CDO (each, as defined in the Credit Agreement), as applicable, plus a margin of 3.50%, or at a rate per annum based on the Base Rate or the Canadian Prime Rate (each, as defined in the Credit Agreement), plus a margin of 2.50%. Loans outstanding under the Revolving Credit Facility denominated in Euros or Australian Dollars bear interest based on EURIBOR or the AUD Rate (each, as defined in the Credit Agreement), respectively, plus a margin of 3.50%. A commitment fee accrues on any unused portion of the commitments under the Revolving Credit Facility. The commitment fee is due and payable quarterly in arrears, and initially was 0.375% per annum and thereafter accrues at a rate per annum ranging from 0.25% to 0.50%, depending on the First Lien Net Leverage Ratio (as defined in the Credit Agreement, the “First Lien Net Leverage Ratio”). The Revolving Credit Facility is not subject to amortization. We are also required to meet certain financial covenants, including maintaining specific liquidity measurements. There are also negative covenants, including certain restrictions on our ability and the ability of our subsidiaries to incur additional indebtedness, create liens, make investments, consolidate, or merge with other entities, enter into transactions with affiliates, make prepayments with respect to certain indebtedness, make dividend payments, loans, or advances to the Company, declare dividends and make restricted payments and other distributions. As of March 30, 2024, we had no outstanding borrowings under the Revolving Credit Facility and $75.0 million was available for future borrowing. 30 Table of Contents Term Loan The Term Loan matures on February 23, 2029. Loans outstanding under the Term Loan bear interest, at the borrower’s option, at a rate per annum based on Term SOFR (as defined in the Credit Agreement), plus a margin ranging from 3.75% to 4.00%, depending on the First Lien Net Leverage Ratio, or based on the Base Rate (as defined in the Credit Agreement), plus a margin ranging from 2.75% to 3.00%, depending on the First Lien Net Leverage Ratio. Loans under the Term Loan are subject to scheduled quarterly amortization payments equal to 0.25% of the initial principal amount of the Term Loan. The obligations under the Credit Agreement are guaranteed by certain of our wholly owned subsidiaries as defined in the security agreement. The obligations under the Credit Agreement are secured by substantially all of the guarantors’ tangible and intangible assets, including, but not limited to, their accounts receivables, equipment, intellectual property, inventory, cash and cash equivalents, deposit accounts and security accounts. The Credit Agreement also restricts payments and other distributions unless certain conditions are met, which could restrict our ability to pay dividends. As of March 30, 2024, we had $282.8 million of outstanding borrowings under the Term Loan. Share Repurchase Program 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 March 30, 2024. As of March 30, 2024, $77.0 million remained available for share repurchases pursuant to our Repurchase Program. Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented: ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended ​ ​ March 30, 2024 April 1, 2023 ​ ​ (in thousands) ​ Net cash used in operating activities $ (34,512) ​ $ (14,476) ​ Net cash used in investing activities (5,345) ​ (9,942) ​ Net cash (used in) provided by financing activities (19,002) ​ 47,086 ​ Effect of exchange rate changes on cash (93) ​ (278) ​ Net (decrease) increase in cash $ (58,952) ​ $ 22,390 ​ ​ Operating Activities 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 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 31 Table of Contents 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. Investing Activities 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. Financing Activities 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 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 Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. Throughout the preparation of these financial statements, we have made estimates and assumptions that impact the reported amounts of assets, liabilities, and the disclosure of contingent liabilities at the date of the financial statements and revenues and expenses during the reporting period. Our critical accounting policies 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. We evaluate these estimates on an ongoing basis. Actual results may differ from estimates. Impairment of Goodwill We evaluate goodwill for impairment at least annually, or more frequently when events or changes in circumstances indicate that the carrying value may not be recoverable. We have selected the first day of the fourth fiscal quarter to perform our annual goodwill impairment testing. We may assess our goodwill for impairment initially using a qualitative approach, or step zero, to determine whether conditions exist to indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value. The qualitative assessment requires significant judgments by management about economic conditions including the entity’s operating environment, its industry and other market considerations, entity-specific events related to financial performance or loss of key personnel, and other events that could impact the reporting unit. If management concludes, based on assessment of relevant events, facts, and circumstances, that it is more likely than not that the reporting unit’s fair value is greater than its carrying value, no further impairment testing is required. If our assessment of qualitative factors indicates that it is more likely than not that the fair value of the reporting unit is less than its carrying value, then a quantitative assessment is performed. We may also elect to initially perform a quantitative analysis instead of 32 Table of Contents starting with step zero. The quantitative analysis requires comparing the carrying value of the reporting unit, including goodwill, to its fair value. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and no further testing is required. If the carrying amount of the reporting unit exceeds its fair value, there is an impairment of goodwill and an impairment loss is recorded. We calculate the impairment loss by comparing the fair value of the reporting unit less the carrying value, including goodwill. The 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 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 in this Quarterly Report on Form 10-Q.