What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-06 compared with 2024-08-07 · 116 added, 112 removed, 257 unchanged (47% of the section changed)

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Certain statements in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All statements contained in this report other than statements of historical fact may constitute forward-looking statements, including statements regarding our future operating results and financial position, our business strategy and plans, business and market trends, our objectives for future operations, macroeconomic and geopolitical conditions, the implementation of our cost reduction plans and expected annualized cost savings, 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.

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 benefits, the implementation of our digital transformation and lean manufacturing activities, a potential non-cash impairment charge for goodwill, the recent acquisition and integration 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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Recent Developments

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.

Highlights for the fiscal quarter ended September 28, 2024

● Decrease in net sales of 6.4%, or $10.3 million, to $150.5 million for the fiscal quarter ended September 28, 2024, compared to $160.8 million for the fiscal quarter ended September 30, 2023.

● Decrease in net income of $0.3 million to $5.9 million and representing a 3.9% net income margin for the fiscal quarter ended September 28, 2024, compared to net income of $6.2 million and representing a 3.8% net income margin for the fiscal quarter ended September 30, 2023.

● Decrease in Adjusted EBITDA (as defined below) of $6.3 million to $29.8 million for the fiscal quarter ended September 28, 2024, compared to $36.1 million for the fiscal quarter ended September 30, 2023.

Adjusted EBITDA margin decreased from 22.4% to 19.8%.

Highlights for the three fiscal quarters ended September 28, 2024

● Decrease in net sales of 11.4%, or $54.4 million, to $421.2 million for the three fiscal quarters ended September 28, 2024, compared to $475.6 million for the three fiscal quarters ended September 30, 2023.

● Increase in net income of $13.8 million to a net income of $11.3 million and representing a 2.7% net income margin for the three fiscal quarters ended September 28, 2024, compared to net loss of $2.5 million for the three fiscal quarters ended September 30, 2023.

● Decrease in Adjusted EBITDA (as defined below) of $1.5 million to $76.6 million for the three fiscal quarters ended September 28, 2024, compared to $78.1 million for the three fiscal quarters ended September 30, 2023.

Adjusted EBITDA margin improved from 16.4% to 18.2%.

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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 half of 2024, mainly driven by lower packaged pool demand.

Fiberglass products continue to show strength relative to packaged pools.

As anticipated, this resulted in a decline in new in-ground residential pool installations in the first nine months of 2024.

Within our in-ground pool product line, fiberglass pools 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.

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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 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.

As previously disclosed, 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 believe that Latham’s financial model has changed structurally, which has increased our underlying earnings capabilities amid an industry recovery.

And we are increasing our investments in sales and marketing and product development initiatives to ensure that we capture an incremental share of in-ground pool sales once volumes rebound.

Strategic Acquisition

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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 cash purchase price was $64.0 million, net of cash acquired.

The transaction was fully funded with cash on hand.

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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.

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 is gross profit as a percentage of our net sales.

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Results of Operations

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 September 28, 2024 Compared to Fiscal Quarter Ended September 30, 2023

The following table summarizes our results of operations for the fiscal quarter ended September 28, 2024 and September 30, 2023 (dollars in thousands):

Fiscal Quarter Ended

June 29, 2024

September 28, 2024

September 30, 2023

(dollars in thousands)

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Interest expense, net

Other expense (income), net

Other (income) expense, net

Total other expense, net

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Income before income taxes

Income tax expense

Income tax (benefit) expense

Adjusted EBITDA (a)

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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.

Net sales were $150.5 million for the fiscal quarter ended September 28, 2024, compared to $160.8 million for the fiscal quarter ended September 30, 2023.

The $10.3 million, or 6.4%, decrease in net sales was because of a $9.5 million decrease in sales volume and a $0.8 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.

The sales volume decrease was primarily driven by continued soft industry conditions and a challenging macroeconomic environment.

The decrease in net sales of $10.3 million across our product lines consisted of a decrease $8.1 million for in-ground swimming pools and $2.5 million for liners, partially offset by a $0.3 million increase for covers aided by the Coverstar Central acquisition.

Cost of Sales and Gross Margin

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.

Cost of sales was $101.8 million for the fiscal quarter ended September 28, 2024, compared to $112.6 million for the fiscal quarter ended September 30, 2023.

Gross margin increased by 2.5%, to 32.4% of net sales for the fiscal quarter ended September 28, 2024, compared to 29.9% of net sales for the fiscal quarter ended September 30, 2023.

The $10.8 million, or 9.6%, decrease in cost of sales was primarily the result of the decrease in sales volume which in turn was partially offset by the impact of production efficiencies resulting from lean manufacturing and value engineering programs and lower material costs.

The 2.5% increase in gross margin was primarily driven by the impact of production efficiencies resulting from lean manufacturing and value engineering programs and procurement improvements that resulted in lower material costs and the acquisition of Coverstar Central.

Selling, General, and Administrative Expense

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.

Selling, general, and administrative expense was $28.3 million for the fiscal quarter ended September 28, 2024, compared to $23.4 million for the fiscal quarter ended September 30, 2023.

The $4.9 million, or 20.9%, increase in selling, general, and administrative expense was primarily driven by increased spending on sales and marketing to further strengthen our position ahead of a market turnaround, performance-based compensation and the acquisition of Coverstar Central, partially offset by a $0.4 million decrease in non-cash stock-based compensation expense.

Amortization was $7.0 million for the fiscal quarter ended September 28, 2024, compared to $6.6 million for the fiscal quarter ended September 30, 2023.

The $0.4 million, or 5.2%, increase in amortization was driven by the acquisition of Coverstar Central.

Interest Expense, net

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.

Interest expense, net was $9.2 million for the fiscal quarter ended September 28, 2024, compared to $6.0 million for the fiscal quarter ended September 30, 2023.

The $3.2 million, or 53.1%, 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 September 30, 2023.

Other (Income) Expense, Net

Other income, net was $ (0.7) million for the fiscal quarter ended September 28, 2024, compared to other expense, net of $1.0 million for fiscal quarter ended September 30, 2023.

The $1.7 million increase in other income, net was primarily driven by a favorable change in net foreign currency transaction gains and losses associated with our international subsidiaries.

Earnings from Equity Method Investment

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.

Earnings from our equity method investment in Premier Pools & Spa were $0.9 million for the fiscal quarter ended September 28, 2024, compared to $1.8 million for the fiscal quarter ended September 30, 2023, due to the financial performance of Premier Pools & Spa.

Income Tax (Benefit) Expense

Income tax benefit was less than $(0.1) million for the fiscal quarter ended September 28, 2024, compared to income tax expense of $6.7 million for the fiscal quarter ended September 30, 2023.

Our effective tax rate was (0.7)% for the fiscal quarter ended September 28, 2024, compared to 52.1% for the fiscal quarter ended September 30, 2023.

The difference between the U.S.

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.

federal statutory income tax rate and our effective income tax rate for both the fiscal quarters ended September 28, 2024 and September 30, 2023 was primarily attributable to the impacts of stock-based compensation expense and foreign income.

Net income was $5.9 million for the fiscal quarter ended September 28, 2024, compared to $6.2 million for the fiscal quarter ended September 30, 2023.

The $0.3 million, or 4.2%, decrease 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.

Net income margin was 3.9% for the fiscal quarter ended September 28, 2024, compared to 3.8% for the fiscal quarter ended September 30, 2023.

The 0.1% increase in net income margin was driven by the factors described above.

Adjusted EBITDA

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 was $29.8 million for the fiscal quarter ended September 28, 2024, compared to $36.1 million for the fiscal quarter ended September 30, 2023.

The $6.3 million, or 17.3%, decrease in Adjusted EBITDA was primarily because of the decrease in cost of sales and an increase 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 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

Adjusted EBITDA margin was 19.8% for the fiscal quarter ended September 28, 2024, compared to 22.4% for the fiscal quarter ended September 30, 2023.

The 2.6% decrease in Adjusted EBITDA margin was primarily because of a $6.3 million decrease in Adjusted EBITDA, compared to the fiscal quarter ended September 30, 2023, which were impacted by the factors described above.

Three Fiscal Quarters Ended September 28, 2024 Compared to Three Fiscal Quarters Ended September 30, 2023

The following table summarizes our results of operations for the three fiscal quarters ended September 28, 2024 and September 30, 2023:

Three Fiscal Quarters Ended

September 28, 2024

September 30, 2023

(dollars in thousands)

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Interest expense, net

Other expense (income), net

Other expense, net

Total other expense, net

Earnings from equity method investment

Income (loss) before income taxes

Income before income taxes

Income tax expense

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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.

Net sales were $421.2 million for the three fiscal quarters ended September 28, 2024, compared to $475.6 million for the three fiscal quarters ended September 30, 2023.

The $54.4 million, or 11.4%, decrease in net sales was because of a $51.7 million decrease in sales volume and a $2.7 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.

The net sales decrease was primarily driven by continued macroeconomic weakness and consisted of a decrease of $36.5 million for in-ground swimming pools, $9.1 million for liners and $8.8 million for covers.

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.

Cost of sales was $288.9 million for the three fiscal quarters ended September 28, 2024, compared to $343.9 million for the three fiscal quarters ended September 30, 2023.

Gross margin increased by 3.7%, to 31.4% of net sales for the three fiscal quarters ended September 28, 2024, compared to 27.7% of net sales for the three fiscal quarters ended September 30, 2023.

The $55.0 million, or 16.0%, 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 the acquisition of Coverstar Central.

The 3.7% 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.

Deflation and supplier optimization partially offset the price decrease mentioned above.

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.

Selling, general, and administrative expense was $81.2 million for the three fiscal quarters ended September 28, 2024, compared to $86.7 million for the three fiscal quarters ended September 30, 2023.

The $5.5 million, or 6.4%, decrease in selling, general, and

administrative expense was primarily driven by a $9.8 million decrease in non-cash stock-based compensation expense, as well as our cost containment initiatives and restructuring programs, partially offset by an increase in performance-based compensation and increased spending on sales and marketing to further strengthen our position ahead of a market turnaround.

Amortization was $19.8 million for the three fiscal quarters ended September 28, 2024, compared to $19.9 million for the three fiscal quarters ended September 30, 2023.

The $0.1 million, or 0.4%, decrease in amortization was driven by certain definite-lived intangible assets becoming fully amortized during the fiscal year ended December 31, 2023 partially offset by the acquisition of Coverstar Central.

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.

Interest expense, net was $20.2 million for the three fiscal quarters ended September 28, 2024, compared to $21.3 million for the three fiscal quarters ended September 30, 2023.

The $1.1 million, or 5.3%, decrease in interest expense, net was primarily the result of the change in the fair value of our interest rate swap, compared to the three fiscal quarters ended September 30, 2023.

Other Expense, Net

Other expense, net was $1.7 million for the three fiscal quarters ended September 28, 2024, compared to $0.2 million for the three fiscal quarters ended September 30, 2023.

The $1.5 million increase in other expense, 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.

Earnings from our equity method investment in Premier Pools & Spa were $2.8 million for the three fiscal quarters ended September 28, 2024, compared to $2.5 million for the three fiscal quarters ended September 30, 2023, due to 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.

Income tax expense was $0.9 million for the three fiscal quarters ended September 28, 2024, compared to income tax expense of $8.6 million for the three fiscal quarters ended September 30, 2023.

Our effective tax rate was 7.6% for the three fiscal quarters ended September 28, 2024, compared to 140.7% for the three fiscal quarters ended September 30, 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.

federal statutory income tax rate and our effective income tax rate for both the three fiscal quarters ended September 28, 2024 and September 30, 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.

Net income was $11.3 million for the three fiscal quarters ended September 28, 2024, compared to $2.5 million of net loss for the three fiscal quarters ended September 30, 2023.

The $13.8 million, or 552.4%, 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.

Net income margin was 2.7% for the three fiscal quarters ended September 28, 2024, compared to net loss margin of 0.5% for the three fiscal quarters ended September 30, 2023.

The 3.2% increase in net income margin was driven by a $13.8 million increase in net income, compared to the three fiscal quarters ended September 30, 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 was $76.6 million for the three fiscal quarters ended September 28, 2024, compared to $78.1 million for the three fiscal quarters ended September 30, 2023.

The $1.5 million, or 1.9%, decrease in Adjusted EBITDA was primarily because of the decrease in net sales, partially offset by the decrease in cost resulting from lean manufacturing and value engineering programs, 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.

Adjusted EBITDA margin was 18.2% for the three fiscal quarters ended September 28, 2024, compared to 16.4% for the three fiscal quarters ended September 30, 2023.

The 1.8% increase in Adjusted EBITDA margin was primarily because of a decrease in cost of sales and selling, general and administrative expenses, compared to the three fiscal quarters ended September 30, 2023, which was impacted by the other factors described above.

Non-GAAP Financial Measures

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Fiscal Quarter Ended

Two Fiscal Quarters Ended

June 29, 2024

Three Fiscal Quarters Ended

September 28, 2024

September 30, 2023

September 28, 2024

September 30, 2023

(dollars in thousands)

2 unchanged sentences

Interest expense, net

Income tax expense

Income tax (benefit) expense

Loss on sale and disposal of property and equipment

1 unchanged sentence

Stock-based compensation expense (b)

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

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

Strategic initiative costs (d)

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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 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.

As of September 28, 2024, we had $59.9 million of cash, $282.8 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 cash purchase price was $64.0 million, net of cash acquired.

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

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(“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”).

Dollar senior secured term loan (the “Term Loan”) in an initial principal amount of $325.0 million.

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 June 29, 2024, we were in compliance with all covenants under the Revolving Credit Facility and the Term Loan.

As of September 28, 2024, we were in compliance with all covenants under the Revolving Credit Facility and the Term Loan.

Revolving Credit Facility

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

As of June 29, 2024, we had no outstanding borrowings under the Revolving Credit Facility and $75.0 million was available for future borrowing.

As of September 28, 2024, we had no outstanding borrowings under the Revolving Credit Facility and $75.0 million was available for future borrowing.

The Term Loan matures on February 23, 2029.

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

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

As of September 28, 2024, we had $282.8 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 June 29, 2024.

As of June 29, 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 September 28, 2024.

As of September 28, 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:

Two Fiscal Quarters Ended

June 29, 2024

Three Fiscal Quarters Ended

September 28, 2024

September 30, 2023

(in thousands)

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Operating Activities

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

During the three fiscal quarters ended September 28, 2024, operating activities provided $55.2 million of cash.

Net income, after adjustments for non-cash items, provided cash of $60.3 million.

Cash provided by operating activities was further driven by changes in our operating assets and liabilities, which used $5.2 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.

Net cash used by changes in our operating assets and liabilities for the

three fiscal quarters ended September 28, 2024 consisted primarily of a $35.6 million increase in trade receivables, a $6.6 million increase in income tax receivable, a $2.3 million increase in prepaid expenses and other current assets and a $0.6 million increase in other long-term liabilities, partially offset by a $25.5 million decrease in inventories, a $10.4 million increase in accounts payable, a $3.4 million increase in accrued expenses and other current liabilities, and a $0.6 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.

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

Net loss, after adjustments for non-cash items, provided cash of $56.0 million.

Cash provided by operating activities was further driven by changes in our operating assets and liabilities, which provided $32.1 million.

Net cash provided by changes in our operating assets and liabilities for the 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.

Net cash provided by changes in our operating assets and liabilities for the three fiscal quarters ended September 30, 2023 consisted primarily of a $61.7 million decrease in inventories, a $3.0 million increase in other long-term liabilities and a $2.1 million increase in accounts payable partially offset by a $28.7 million increase in trade receivables, a $4.3 million increase in other assets, a $1.5 million increase in income tax receivable, a $0.3 million increase in prepaid expenses and other current assets and a $0.2 million decrease in accrued expenses and other current liabilities.

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

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Investing Activities

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 three fiscal quarters ended September 28, 2024, investing activities used $77.9 million of cash, consisting of our acquisition of Coverstar Central for cash consideration of $64.0 million, net of cash acquired, and purchases of property and equipment for $13.9 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 fiscal year.

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.

During the three fiscal quarters ended September 30, 2023, investing activities used $28.3 million of cash, consisting of purchases of property and equipment for $28.3 million.

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

Financing Activities

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.

During the three fiscal quarters ended September 28, 2024, financing activities used $20.2 million of cash, primarily consisting of repayments on long-term debt borrowings of $19.6 million and repayments of finance lease obligations of $0.6 million.

During the three fiscal quarters ended September 30, 2023, financing activities used $12.9 million of cash, primarily consisting of repayments on revolving credit facilities of $48.0 million, repayments on long-term debt borrowings of $12.4 million, and repayments of finance lease obligations of $0.4 million, partially offset by borrowings on revolving credit facilities of $48.0 million.

Contractual Obligations

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.

There have been no material changes, outside of the ordinary course of business, to our contractual obligations during the three fiscal quarters ended September 28, 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.

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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