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Item 2. Management’s Discussion and Analysis

2024-08-07 compared with 2024-05-08 · 178 added, 98 removed, 191 unchanged (59% 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”).

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, (“SEC”) on March 13, 2024 (the “Annual Report”).

As used in this Quarterly Report on Form 10-Q, references to “ Latham, ” “ the Company, ” “ we, ” “ us ” and “ our, ” refer to the Company and its consolidated subsidiaries unless otherwise indicated or the context requires otherwise.

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.

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, the recent acquisition of Coverstar Central, LLC.

(“Coverstar Central”), 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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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.

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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.

Highlights for the fiscal quarter ended June 29, 2024

● Decrease in net sales of 9.6%, or $17.0 million, to $160.1 million for the fiscal quarter ended June 29, 2024, compared to $177.1 million for the fiscal quarter ended July 1, 2023.

● Increase in net income of $7.6 million to $13.3 million and representing an 8.3% net income margin for the fiscal quarter ended June 29, 2024, compared to net income of $5.7 million and representing a 3.2% net income margin for the fiscal quarter ended July 1, 2023.

● Increase in Adjusted EBITDA (as defined below) of $3.5 million to $34.5 million for the fiscal quarter ended June 29, 2024, compared to $31.0 million for the fiscal quarter ended July 1, 2023.

Adjusted EBITDA margin improved from 17.5% to 21.5%.

Highlights for the two fiscal quarters ended June 29, 2024

● Decrease in net sales of 14.0%, or $44.0 million, to $270.8 million for the two fiscal quarters ended June 29, 2024, compared to $314.8 million for the two fiscal quarters ended July 1, 2023.

● Increase in net income of $14.1 million to a net income of $5.4 million and representing a 2.0% net income margin for the two fiscal quarters ended June 29, 2024, compared to net loss of $8.7 million for the two fiscal quarters ended July 1, 2023.

● Increase in Adjusted EBITDA (as defined below) of $4.8 million to $46.8 million for the two fiscal quarters ended June 29, 2024, compared to $42.0 million for the two fiscal quarters ended July 1, 2023.

Adjusted EBITDA margin improved from 13.3% to 17.3%.

Business Update

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

Ongoing macroeconomic softness has impacted and is 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.

new in-ground residential pool installations in the first half 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.

Notably, this involves continued investment in our sales, marketing, engineering and research and development efforts that are designed to accelerate conversion to fiberglass pool products and ongoing digital transformation programs.

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.

We realized 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 fiscal quarter and $2.1 million realized in the second fiscal quarter.

Strategic Acquisition

Strategic transactions continue to be part of our growth strategy.

On August 2, 2024, we completed a stock acquisition (the “Coverstar Central Acquisition”) of Coverstar Central, our exclusive dealer of automatic safety covers in 29 states – mainly in the center of the U.S.

Coverstar Central has been our trusted partner since 2006, and this acquisition represents a valuable strategic opportunity that we expect to benefit from in multiple ways.

First, the vertical integration of our automatic safety cover product line in the acquired geographies is expected to increase margins.

Second, as one company with a fully integrated sales and marketing strategy, we expect to accelerate the sales growth of this product line.

Finally, we see opportunities to leverage Coverstar Central’s long-standing relationships with pool builders in its markets to increase the awareness of, and conversion to, fiberglass pools.

We believe the Coverstar Central Acquisition will be immediately accretive to our net income, Adjusted EBITDA and Adjusted EBITDA margin for the fiscal year ending December 31, 2024 and enhance our gross margins in the long-term.

The purchase price was $64.5 million, subject to certain adjustments, including for working capital, as compared to an agreed upon target and transaction expenses.

The transaction was fully funded with cash on hand.

Key Performance Indicators

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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.

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 (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.

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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.

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

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 June 29, 2024 Compared to Fiscal Quarter Ended July 1, 2023

The following table summarizes our results of operations for the fiscal quarter ended June 29, 2024 and July 1, 2023 (dollars in thousands):

Fiscal Quarter Ended

March 30, 2024

April 1, 2023

June 29, 2024

(dollars in thousands)

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Selling, general, and administrative expense

Loss from operations

Other expense:

Income from operations

Other expense (income):

Interest expense, net

Other expense, net

Other expense (income), net

Total other expense, net

Earnings from equity method investment

Loss before income taxes

Income tax expense (benefit)

Income before income taxes

Income tax expense

Adjusted EBITDA (a)

________________________________________

(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 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.

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 $160.1 million for the fiscal quarter ended June 29, 2024, compared to $177.1 million for the fiscal quarter ended July 1, 2023.

The $17.0 million, or 9.6%, decrease in net sales was because of a $16.4 million decrease in sales volume and a $0.6 million decrease from lower pricing.

The sales volume decrease was primarily driven by continued macroeconomic softness, partially offset by normalized seasonality.

The decrease in net sales of $17.0 million across our product lines consisted of $9.6 million for in-ground swimming pools, $4.2 million for liners and $3.3 million for covers.

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.

Cost of sales was $107.1 million for the fiscal quarter ended June 29, 2024, compared to $126.9 million for the fiscal quarter ended July 1, 2023.

Gross margin increased by 4.7%, to 33.1% of net sales for the fiscal quarter ended June 29, 2024, compared to 28.4% of net sales for the fiscal quarter ended July 1, 2023.

The $19.8 million, or 15.6%, decrease in cost of sales was primarily the result of the decrease in sales volume, the impact of production efficiencies resulting from lean manufacturing and value engineering programs and lower material costs, partially offset by a $0.6 million increase in non-cash stock-based compensation expense.

The 4.7% increase in gross margin was primarily driven by the impact of previously announced restructuring programs, the impact of production efficiencies resulting from lean manufacturing and value engineering programs, cost control and lower raw 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.

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.

Selling, general, and administrative expense was $26.6 million for the fiscal quarter ended June 29, 2024, compared to $30.2 million for the fiscal quarter ended July 1, 2023, and decreased as a percentage of net sales by 0.5%.

The $3.6 million, or 12.0%, decrease in selling, general, and administrative expense was primarily driven by a $4.3 million decrease in non-cash stock-based compensation expense, as well as our cost containment initiatives and restructuring projects, partially offset by an increase of $4.8 million in accrued performance-based compensation.

Amortization was $6.4 million for the fiscal quarter ended June 29, 2024, compared to $6.6 million for the fiscal quarter ended July 1, 2023.

The $0.2 million, or 3.1%, 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.

Interest expense, net was $6.0 million for the fiscal quarter ended June 29, 2024, compared to $4.5 million for the fiscal quarter ended July 1, 2023.

The $1.5 million, or 34.0%, increase 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 July 1, 2023.

Other Expense (Income), Net

Other expense (income), net was $0.8 million for the fiscal quarter ended June 29, 2024, compared to $(1.0) million for fiscal quarter ended July 1, 2023.

The $1.8 million increase in other expense (income), net 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.

Earnings from our equity method investment in Premier Pools & Spa were $0.5 million for the fiscal quarter ended June 29, 2024, compared to $0.7 million for the fiscal quarter ended July 1, 2023, because of the financial performance of Premier Pools & Spa.

Income Tax Expense

Income tax expense was $0.4 million for the fiscal quarter ended June 29, 2024, compared to income tax expense of $4.9 million for the fiscal quarter ended July 1, 2023.

Our effective tax rate was 3.2% for the fiscal quarter ended June 29, 2024, compared to 46.1% for the fiscal quarter ended July 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 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.

federal statutory income tax rate and our effective income tax rate for both the fiscal quarters ended June 29, 2024 and July 1, 2023 was primarily attributable to the impacts of stock-based compensation expense and foreign income.

Net income was $13.3 million for the fiscal quarter ended June 29, 2024, compared to $5.7 million for the fiscal quarter ended July 1, 2023.

The $7.6 million, or 132.4%, increase in net income was primarily because of the factors described above.

Net Income Margin

Net income margin was 8.3% for the fiscal quarter ended June 29, 2024, compared to 3.2% for the fiscal quarter ended July 1, 2023.

The 5.1% increase in net income margin was driven by a $7.6 million increase in net income compared to the fiscal quarter ended July 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 was $34.5 million for the fiscal quarter ended June 29, 2024, compared to $31.0 million for the fiscal quarter ended July 1, 2023.

The $3.5 million, or 11.2%, increase in Adjusted EBITDA was primarily because of the decrease in cost of sales

and 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.

Adjusted EBITDA margin was 21.5% for the fiscal quarter ended June 29, 2024, compared to 17.5% for the fiscal quarter ended July 1, 2023.

The 4.0% increase in Adjusted EBITDA margin was primarily because of a $3.5 million increase in Adjusted EBITDA, compared to the fiscal quarter ended July 1, 2023, which were impacted by the factors described above.

Two Fiscal Quarters Ended June 29, 2024 Compared to Two Fiscal Quarters Ended July 1, 2023

The following table summarizes our results of operations for the two fiscal quarters ended June 29, 2024 and July 1, 2023:

Two Fiscal Quarters Ended

June 29, 2024

(dollars in thousands)

Cost of sales

Selling, general, and administrative expense

Income from operations

Other expense (income):

Interest expense, net

Other expense (income), net

Total other expense, net

Earnings from equity method investment

Income (loss) before income taxes

Income tax expense

Net income (loss)

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 $270.8 million for the two fiscal quarters ended June 29, 2024, compared to $314.8 million for the two fiscal quarters ended July 1, 2023.

The $44.0 million, or 14.0%, decrease in net sales was because of a $42.2 million decrease in sales volume and a $1.9 million decrease from lower pricing.

The sales volume decrease was primarily driven by continued macroeconomic softness, lower backlog entering the fiscal year and normalized seasonality.

The decrease in net sales of $44.0 million across our product lines consisted of $28.4 million for in-ground swimming pools, $9.1 million for covers and $6.6 million for liners.

Cost of Sales and Gross Margin

Cost of sales was $187.1 million for the two fiscal quarters ended June 29, 2024, compared to $231.2 million for the two fiscal quarters ended July 1, 2023.

Gross margin increased by 4.3%, to 30.9% of net sales for the two fiscal quarters ended June 29, 2024, compared to 26.6% of net sales for the two fiscal quarters ended July 1, 2023.

The $44.1 million, or 19.1%, decrease in cost of sales was primarily the result of the decrease in sales volume, the impact of production efficiencies resulting from lean manufacturing and value engineering programs and lower material costs, partially offset by a $0.2 million increase in non-cash stock-based compensation expense.

The 4.3% increase in gross margin was primarily driven by the impact of previously announced restructuring programs, the impact of production efficiencies from lean manufacturing and value engineering programs, cost control, material deflation in line with expectations and supplier optimization.

Selling, General, and Administrative Expense

Selling, general, and administrative expense was $52.8 million for the two fiscal quarters ended June 29, 2024, compared to $63.3 million for the two fiscal quarters ended July 1, 2023, and decreased as a percentage of net sales by 0.6%.

The $10.5 million, or 16.5%, decrease in selling, general, and administrative expense was primarily driven by a $9.4 million decrease in non-cash stock-

based compensation expense, as well as our cost containment initiatives and restructuring projects, partially offset by an increase of $4.8 million in accrued performance-based compensation.

Amortization was $12.8 million for the two fiscal quarters ended June 29, 2024, compared to $13.3 million for the two fiscal quarters ended July 1, 2023.

The $0.5 million, or 3.2%, 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 $11.0 million for the two fiscal quarters ended June 29, 2024, compared to $15.3 million for the two fiscal quarters ended July 1, 2023.

The $4.3 million, or 28.1%, decrease in interest expense, net was primarily the result of the change in the fair value of our interest rate swap, compared to the two fiscal quarters ended July 1, 2023.

Other Expense (Income), Net

Other expense (income), net was $2.4 million for the two fiscal quarters ended June 29, 2024, compared to $(0.8) million for the two fiscal quarters ended July 1, 2023.

The $3.2 million increase in other expense (income), net 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 $1.8 million for the two fiscal quarters ended June 29, 2024, compared to $0.7 million for the two fiscal quarters ended July 1, 2023, because of the financial performance of Premier Pools & Spa.

Income Tax Expense

Income tax expense was $1.0 million for the two fiscal quarters ended June 29, 2024, compared to income tax expense of $2.0 million for the two fiscal quarters ended July 1, 2023.

Our effective tax rate was 15.2% for the two fiscal quarters ended June 29, 2024, compared to (29.2)% for the two fiscal quarters ended July 1, 2023.

The difference between the U.S.

federal statutory income tax rate and our effective income tax rate for both the two fiscal quarters ended June 29, 2024 and July 1, 2023 was primarily attributable to the impacts of stock-based compensation expense and foreign income.

Net Income (Loss)

Net income was $5.4 million for the two fiscal quarters ended June 29, 2024, compared to $8.7 million of net loss for the two fiscal quarters ended July 1, 2023.

The $14.1 million, or 162.6%, increase in net income was primarily because of the factors described above.

Net Income (Loss) Margin

Net income margin was 2.0% for the two fiscal quarters ended June 29, 2024, compared to net loss margin of 2.7% for the two fiscal quarters ended July 1, 2023.

The 4.7% increase in net income margin was driven by a $14.1 million increase in net income, compared to the two fiscal quarters ended July 1, 2023 because of the factors described above.

Adjusted EBITDA

Adjusted EBITDA was $46.8 million for the two fiscal quarters ended June 29, 2024, compared to $42.0 million for the two fiscal quarters ended July 1, 2023.

The $4.8 million, or 11.3%, increase in Adjusted EBITDA was primarily because of the decrease in cost of sales and 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 17.3% for the two fiscal quarters ended June 29, 2024, compared to 13.3% for the two fiscal quarters ended July 1, 2023.

The 4.0% increase in Adjusted EBITDA margin was primarily because of a $4.8 million increase in Adjusted EBITDA, compared to the two fiscal quarters ended July 1, 2023, which was impacted by the other factors described above.

Non-GAAP Financial Measures

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

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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 loss to Adjusted EBITDA for the periods presented and the calculation of Adjusted EBITDA margin:

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

Fiscal Quarter Ended

March 30, 2024

April 1, 2023

Two Fiscal Quarters Ended

June 29, 2024

(dollars in thousands)

Net income (loss)

Depreciation and amortization

Interest expense, net

Income tax expense (benefit)

Income tax expense

Loss on sale and disposal of property and equipment

1 unchanged sentence

Stock-based compensation expense (b)

Unrealized losses on foreign currency transactions (c)

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

Strategic initiative costs (d)

2 unchanged sentences

Adjusted EBITDA

Net loss margin

Net income (loss) margin

Adjusted EBITDA margin

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(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.

(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 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.

As of June 29, 2024, we had $90.8 million of cash, $282.4 million of outstanding indebtedness and an additional $75.0 million of borrowing availability under our Revolving Credit Facility.

On August 2, 2024, we completed the Coverstar Central Acquisition.

The purchase price was $64.5 million, subject to certain adjustments, including for working capital, as compared to an agreed upon target and transaction expenses.

The Coverstar Central Acquisition was fully funded with cash on hand.

While our existing cash balances and net cash provided by operating activities have generally been sufficient to fund our general corporate and working capital needs, our use of significant existing cash on hand to fund the Coverstar Central Acquisition may require us in the future to utilize a portion of our 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.

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

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

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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.

As of June 29, 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.

The Revolving Credit Facility may be utilized to finance ongoing general corporate and working capital needs and permits Latham Pool Products to borrow loans in U.S.

Dollars, Canadian Dollars, Euros and Australian Dollars.

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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.

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

As of June 29, 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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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 guaranteed by certain of our wholly owned subsidiaries that are party to that certain security agreement, which was executed in connection with the Credit 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.

As of June 29, 2024, we had $282.4 million of outstanding borrowings under the Term Loan.

Share Repurchase Program

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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.

We did not repurchase any shares of our common stock during the fiscal quarter ended June 29, 2024.

As of June 29, 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:

Fiscal Quarter Ended

March 30, 2024

April 1, 2023

Two Fiscal Quarters Ended

June 29, 2024

(in thousands)

Net cash used in operating activities

Net cash provided by operating activities

Net cash used in investing activities

Net cash (used in) provided by financing activities

Net cash used in financing activities

Effect of exchange rate changes on cash

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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.

During the two fiscal quarters ended June 29, 2024, operating activities provided $17.9 million of cash.

Net income, after adjustments for non-cash items, provided cash of $36.1 million.

Cash provided by operating activities was further driven by changes in our operating assets and liabilities, which used $18.2 million.

Net cash used by changes in our operating assets and liabilities for the two fiscal quarters ended June 29, 2024 consisted primarily of a $36.8 million increase in trade receivables, a $2.3 million increase in prepaid expenses and other current assets, a $1.2 million decrease in accrued expenses and other current liabilities, a $0.7 million increase in income tax receivable and a $0.4 million decrease in other long-term liabilities, partially offset by a $13.1 million decrease in inventories, a $9.8 million increase in accounts payable and a $0.3 million decrease in other assets.

The change in trade receivables was primarily driven by the timing of net sales, the change in inventories was driven by efforts to meet a reduced demand outlook while maintaining lead times and service levels and the changes in accounts payable were primarily driven by volume of purchases and timing of payments.

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

Net loss, after adjustments for non-cash items, provided cash of $35.6 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.

Cash provided by operating activities was further driven by changes in our operating assets and liabilities, which provided $0.7 million.

Net cash provided by changes in our operating assets and liabilities for the two fiscal quarters ended July 1, 2023 consisted primarily of a $38.9 million decrease in inventories, and a $8.9 million increase in accounts payable, partially offset by a $37.3 million increase in trade receivables, a $6.9 million decrease in accrued expenses and other current liabilities, a $1.4 million increase in income tax receivable, a $0.9 million increase in prepaid expenses and other current assets, a $0.4 million increase in other assets, and a $0.2 million decrease in other long-term liabilities.

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.

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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.

During the two fiscal quarters ended June 29, 2024, investing activities used $9.8 million of cash, consisting of purchases of property and equipment for $9.8 million.

During the two fiscal quarters ended July 1, 2023, investing activities used $23.4 million of cash, consisting of purchases of property and equipment for $23.4 million.

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.

During the two fiscal quarters ended June 29, 2024, financing activities used $20.0 million of cash, primarily consisting of repayments on long-term debt borrowings of $19.6 million and repayments of finance lease obligations of $0.4 million.

During the two fiscal quarters ended July 1, 2023, financing activities used $1.9 million of cash, primarily consisting of repayments on revolving credit facilities of $48.0 million, repayments on long-term debt borrowings of $1.6 million, and repayments of finance lease obligations of $0.3 million, partially offset by borrowings on revolving credit facilities of $48.0 million.

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.

There have been no material changes, outside of the ordinary course of business, to our contractual obligations during the two fiscal quarters ended June 29, 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.

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.

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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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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