UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from to
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices) | (Zip Code) |
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(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | ☒ | Non-accelerated filer | ☐ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of August 2, 2024,
TABLE OF CONTENTS
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Index to Condensed Consolidated Financial Statements (Unaudited)
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Condensed Consolidated Statements of Comprehensive Income (Loss) | 6 | |
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Latham Group, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
June 29, | December 31, | ||||||
| 2024 |
| 2023 | ||||
Assets | |||||||
Current assets: |
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Cash | $ | | $ | | |||
Trade receivables, net |
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Inventories, net |
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Income tax receivable |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Equity method investment |
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Deferred tax assets |
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Operating lease right-of-use assets | | | |||||
Goodwill |
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Intangible assets, net |
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Other assets | | | |||||
Total assets | $ | | $ | | |||
Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable | $ | | $ | | |||
Accounts payable – related party |
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Current maturities of long-term debt |
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Current operating lease liabilities | | | |||||
Accrued expenses and other current liabilities |
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Total current liabilities |
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Long-term debt, net of discount, debt issuance costs, and current portion |
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Deferred income tax liabilities, net |
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Non-current operating lease liabilities | | | |||||
Other long-term liabilities |
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Total liabilities | $ | | $ | | |||
Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, $ | | | |||||
Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Accumulated other comprehensive loss |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Latham Group, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(unaudited)
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||
| June 29, 2024 |
| July 1, 2023 |
| June 29, 2024 |
| July 1, 2023 | |||||
Net sales | $ | | $ | | $ | | $ | | ||||
Cost of sales |
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Gross profit |
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Selling, general, and administrative expense |
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Amortization |
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Income from operations |
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Other expense: |
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Interest expense, net |
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Other expense (income), net |
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Total other expense, net |
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Earnings from equity method investment | | | | | ||||||||
Income (loss) before income taxes |
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Income tax expense |
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Net income (loss) | $ | | $ | | $ | | $ | ( | ||||
Net income (loss) per share attributable to common stockholders: |
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Basic | $ | | $ | | $ | | $ | ( | ||||
Diluted | $ | | $ | | $ | | $ | ( | ||||
Weighted-average common shares outstanding – basic and diluted |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Latham Group, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||
| June 29, 2024 |
| July 1, 2023 |
| June 29, 2024 |
| July 1, 2023 | |||||
Net income (loss) | $ | | $ | | $ | | $ | ( | ||||
Other comprehensive income (loss), net of tax: |
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Foreign currency translation adjustments |
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Total other comprehensive income (loss), net of tax |
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Comprehensive income (loss) | $ | | $ | | $ | | $ | ( |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Latham Group, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
(unaudited)
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Additional | Other | Total | |||||||||||||||
Paid-in | Accumulated | Comprehensive | Stockholders' | ||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Equity | ||||||||||||
Balances at December 31, 2022 |
| | $ | | $ | | $ | ( | $ | ( | $ | | |||||
Net loss |
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Foreign currency translation adjustments |
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Issuance of common stock upon release of restricted stock units | | — | — | — | — | — | |||||||||||
Stock-based compensation expense |
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Balances at April 1, 2023 |
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Net income |
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Foreign currency translation adjustments |
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Repurchase and retirement of common stock under repurchase program |
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Issuance of common stock upon release of restricted stock units | | — | — | — | — | — | |||||||||||
Stock-based compensation expense | — | — | | — | — | | |||||||||||
Balances at July 1, 2023 |
| | $ | | $ | | $ | ( | $ | ( | $ | | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Latham Group, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
(unaudited)
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Additional | Other | Total | |||||||||||||||
Paid-in | Accumulated | Comprehensive | Stockholders' | ||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Equity | ||||||||||||
Balances at December 31, 2023 |
| | $ | | $ | | $ | ( | $ | ( | $ | | |||||
Net loss |
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Foreign currency translation adjustments |
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Issuance of common stock upon release of restricted stock units | | — | — | — | — | — | |||||||||||
Stock-based compensation expense |
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Balances at March 30, 2024 |
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Net income |
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Foreign currency translation adjustments |
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Issuance of common stock upon release of restricted stock units | | | — | — | — | | |||||||||||
Stock-based compensation expense | — | — | | — | — | | |||||||||||
Balances at June 29, 2024 |
| | $ | | $ | | $ | ( | $ | ( | $ | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
Latham Group, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Two Fiscal Quarters Ended | |||||||
June 29, | July 1, | ||||||
2024 |
| 2023 | |||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | | $ | ( | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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Amortization of deferred financing costs and debt discount |
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Non-cash lease expense |
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Change in fair value of interest rate swaps |
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Stock-based compensation expense |
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Bad debt expense | | | |||||
Other non-cash, net | | | |||||
Earnings from equity method investment | ( | ( | |||||
Distributions received from equity method investment | | | |||||
Changes in operating assets and liabilities: |
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Trade receivables |
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Inventories |
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Prepaid expenses and other current assets |
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Income tax receivable |
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Other assets | | ( | |||||
Accounts payable |
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Accrued expenses and other current liabilities |
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Other long-term liabilities |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Payments on long-term debt borrowings |
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Proceeds from borrowings on revolving credit facility | | | |||||
Payments on revolving credit facilities | | ( | |||||
Repayments of finance lease obligations | ( | ( | |||||
Net cash used in financing activities |
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Effect of exchange rate changes on cash |
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Net (decrease) increase in cash |
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Cash at beginning of period |
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Cash at end of period | $ | | $ | | |||
Supplemental cash flow information: |
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Cash paid for interest | $ | | $ | | |||
Income taxes paid, net | | | |||||
Supplemental disclosure of non-cash investing and financing activities: |
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Purchases of property and equipment included in accounts payable and accrued expenses | $ | | $ | | |||
Capitalized internal-use software included in accounts payable – related party | | | |||||
Right-of-use operating and finance lease assets obtained in exchange for lease liabilities | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Notes to Condensed Consolidated Financial Statements
1. NATURE OF THE BUSINESS
Latham Group, Inc. (the “Company”) wholly owns Latham Pool Products, Inc. (“Latham Pool Products”), a designer, manufacturer, and marketer of in-ground residential swimming pools in North America, Australia, and New Zealand. Latham Pool Products offers a portfolio of in-ground swimming pools and related products, including pool liners and pool covers.
Stock Split, Initial Public Offering and Reorganization
On April 13, 2021, the Company’s certificate of incorporation was amended and restated. On April 13, 2021, the Company effected a
On April 27, 2021, the Company completed its initial public offering (the “IPO”), pursuant to which it issued and sold
Prior to the closing of the Company’s IPO, the Company’s parent entity, Latham Investment Holdings, L.P., merged with and into Latham Group, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The unaudited condensed consolidated balance sheet at December 31, 2023 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying unaudited condensed consolidated financial statements as of June 29, 2024 and for the fiscal quarter and two fiscal quarters ended June 29, 2024 and July 1, 2023, respectively, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with Latham Group, Inc.’s audited consolidated financial statements and the notes thereto for the fiscal year ended December 31, 2023 included in the Company’s 2023 Annual Report on Form 10-K, filed with the SEC on March 13, 2024 (the “Annual Report”). In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of these condensed consolidated financial statements, have been included. The Company’s results of operations for the fiscal quarter and two fiscal quarters ended June 29, 2024 are not necessarily indicative of the results of operations that may be expected for the fiscal year ending December 31, 2024 or other interim periods thereof.
Use of Estimates
The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company bases its estimates on historical experience, known trends, and other market-specific relevant factors that it believes to be reasonable under the circumstances. Estimates are evaluated on an ongoing basis and
10
revised as there are changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known.
Reclassifications
Certain prior period balances have been reclassified to conform to the current period presentation in the condensed consolidated financial statements and the accompanying notes.
Seasonality
Although the Company generally has demand for its products throughout the fiscal year, its business is seasonal and weather is one of the principal external factors affecting the business. Historically, net sales and net income are highest (or net loss is lowest) during the second and third fiscal quarters, representing the peak months of swimming pool use, pool installation, and remodeling and repair activities. Severe weather may also affect net sales in all periods.
Significant Accounting Policies
Refer to the Annual Report for a discussion of the Company’s significant accounting policies, as updated below.
Recently Issued Accounting Pronouncements
The Company qualifies as “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and has elected to “opt in” to the extended transition related to complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application dates for public and nonpublic companies, the Company will adopt the new or revised standard at the time nonpublic companies adopt the new or revised standard and will do so until such time that the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualifies as an emerging growth company. The Company may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which improves financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful analysis. For all entities, ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The amendments should be applied retrospectively to all prior periods presented in the financial statements, with early adoption permitted. The Company is currently evaluating ASU 2023-07 and its potential impact on the notes to the condensed consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), in an effort to enhance the transparency and decision usefulness of income tax disclosures. For all entities, ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. The amendments should be applied prospectively with retrospective application permitted. Early adoption is also permitted. The Company is currently evaluating ASU 2023-09 and its potential impact on the notes to the condensed consolidated financial statements.
In March 2024, the FASB issued ASU 2024-01, Compensation – Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards (“ASU 2024-01”), which improves financial reporting by providing clarity on when an entity should apply the scope guidance in paragraph 718-10-15-3. ASU 2024-01 is effective for public business entities for fiscal years beginning after December 15, 2024. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2025. The amendments should be applied retrospectively to all prior periods presented in the financial statements, with early adoption permitted. The Company is currently evaluating ASU 2024-01 and its potential impact on the condensed consolidated financial statements.
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3. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value.
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
Level 3 — Unobservable inputs that reflect the Company’s own assumptions incorporated into valuation techniques. These valuations require significant judgment.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When there is more than one input at different levels within the hierarchy, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assessment of the significance of a particular input to the fair value measurement in its entirety requires substantial judgment and consideration of factors specific to the asset or liability. Level 3 inputs are inherently difficult to estimate. Changes to these inputs can have significant impact on fair value measurements. Assets and liabilities measured at fair value using Level 3 inputs are based on one or more of the following valuation techniques: market approach, income approach or cost approach. There were no transfers between fair value measurement levels during the two fiscal quarters ended June 29, 2024 or July 1, 2023.
Assets and liabilities measured at fair value on a nonrecurring basis
The Company’s non-financial assets such as goodwill, intangible assets, and property and equipment are measured at fair value upon acquisition and remeasured to fair value when an impairment charge is recognized. Such fair value measurements are based predominantly on Level 2 and Level 3 inputs.
Fair value of financial instruments
The Company considers the carrying amounts of cash, trade receivables, prepaid expenses and other current assets, accounts payable, and accrued expenses and other current liabilities to approximate fair value because of the short-term maturities of these instruments.
Term loan
The Company’s Term Loan (as defined below; see Note 6) is carried at amortized cost; however, the Company estimates the fair value of the Term Loan for disclosure purposes. The fair value of the Term Loan is determined using inputs based on observable market data of a non-public exchange, which are classified as Level 2 inputs. The following table sets forth the carrying amount and fair value of its Term Loan (in thousands):
June 29, 2024 | December 31, 2023 | ||||||||||||
Carrying | Estimated | Carrying | Estimated | ||||||||||
| Value |
| Fair Value |
| Value |
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Term Loan | $ | | $ | | $ | | $ | |
Interest rate swap
The Company estimates the fair value of interest rate swaps (see Note 6) on a fiscal quarterly basis using Level 2 inputs, including the forward SOFR curve. The fair value is estimated by comparing (i) the present value of all future monthly fixed rate payments versus (ii) the variable payments based on the forward SOFR curve. As of June 29, 2024 and December 31, 2023, the fair value of the Company’s interest rate swap was an asset of $
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4. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
The carrying amount of goodwill as of June 29, 2024 and as of December 31, 2023 was $
Intangible Assets
Intangible assets, net as of June 29, 2024 consisted of the following (in thousands):
June 29, 2024 | ||||||||||||
Gross | Foreign | |||||||||||
Carrying | Currency | Accumulated | Net | |||||||||
| Amount |
| Translation |
| Amortization |
| Amount | |||||
Trade names and trademarks | $ | | $ | ( | $ | | $ | | ||||
Patented technology |
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Technology | | | | | ||||||||
Pool designs |
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Franchise relationships |
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Dealer relationships |
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Order backlog | | | | | ||||||||
Non-competition agreements |
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$ | | $ | ( | $ | | $ | |
The Company recognized $
Intangible assets, net as of December 31, 2023 consisted of the following (in thousands):
December 31, 2023 | ||||||||||||
Gross | Foreign | |||||||||||
Carrying | Currency | Accumulated | Net | |||||||||
| Amount |
| Translation |
| Amortization |
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Trade names and trademarks | $ | | $ | | $ | | $ | | ||||
Patented technology |
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Technology | | | | | ||||||||
Pool designs |
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Franchise relationships |
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Dealer relationships |
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Order backlog | | | | | ||||||||
Non-competition agreements |
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$ | | $ | | $ | | $ | |
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The Company estimates that amortization expense related to definite-lived intangible assets will be as follows in each of the next five fiscal years and thereafter (in thousands):
Estimated Future | |||
Amortization | |||
Fiscal Year Ending |
| Expense | |
Remainder of fiscal year 2024 | $ | | |
2025 |
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2026 |
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2027 |
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2028 |
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Thereafter |
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$ | |
5. INVENTORIES, NET
Inventories, net consisted of the following (in thousands):
| June 29, 2024 |
| December 31, 2023 | ||||
Raw materials | $ | | $ | | |||
Finished goods |
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$ | | $ | |
6. LONG-TERM DEBT
The components of the Company’s outstanding long-term debt obligations consisted of the following (in thousands):
| June 29, 2024 |
| December 31, 2023 | ||||
Term Loan | $ | | $ | | |||
Revolving Credit Facility | | | |||||
Less: Unamortized discount and debt issuance costs |
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Total debt |
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Less: Current portion of long-term debt |
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Total long-term debt | $ | | $ | |
On February 23, 2022, Latham Pool Products entered into an agreement (the “Credit Agreement”) with Barclays Bank PLC, which provides a senior secured multicurrency revolving line of credit (the “Revolving Credit Facility”) in an initial principal amount of $
As of June 29, 2024, the Company was in compliance with all financial covenants under the Credit Agreement.
Revolving Credit Facility
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. The Revolving Credit Facility matures on February 23, 2027. Loans outstanding under the Revolving Credit Facility denominated in U.S. Dollars and Canadian Dollars bear interest, at the borrower’s option, at a rate per annum based on Term SOFR or CDO (each, as defined in the Credit Agreement), as applicable, plus a margin of
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Credit Facility. The commitment fee is due and payable quarterly in arrears, and initially was
The Company incurred debt issuance costs of $
The Company is required to meet certain financial covenants in connection with the Revolving Credit Facility, including maintaining specific liquidity measurements. There are also negative covenants, including certain restrictions on the Company’s and its subsidiaries’ ability 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, there were
Term Loan
The Term Loan matures on February 23, 2029. The Term Loan bears interest, at the borrower’s option, at a rate per annum based on Term SOFR (as defined in the Credit Agreement), plus a margin ranging from
During the two fiscal quarters ended June 29, 2024, the Company made a payment of $
Outstanding borrowings as of June 29, 2024 were $
As of June 29, 2024, the unamortized debt issuance costs and discount on the Term Loan were $
Interest Rate Risk
Interest rate risk associated with the Credit Agreement is mitigated partially through interest rate swaps.
The Company executed an interest rate swap on April 30, 2020. The swap had an effective date of May 18, 2020 and a termination date of May 18, 2023. In February 2022, the Company amended its interest rate swap to change the index rate from LIBOR to SOFR in connection with the entry into the Credit Agreement. Under the terms of the amended swap, the Company fixed its SOFR borrowing rate at
Additionally, the Company entered into an interest rate swap that was executed on March 10, 2023. The swap has an effective date of May 18, 2023 and a termination date of May 18, 2026. Under the terms of the swap, the Company fixed its SOFR borrowing rate at
15
Debt Maturities
Principal payments due on the outstanding debt, excluding the Revolving Credit Facility, in the next five fiscal years, excluding any potential payments based on excess cash flow, are as follows (in thousands):
Fiscal Year Ending | Term Loan | ||
Remainder of fiscal year 2024 |
| $ | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 | | ||
Thereafter |
| | |
$ | |
Guarantees
The obligations under the Credit Agreement are guaranteed by certain wholly owned subsidiaries (the “Guarantors”) of the Company 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 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 the Company’s ability to pay dividends.
7. PRODUCT WARRANTIES
The warranty reserve activity consisted of the following (in thousands):
Two Fiscal Quarters Ended | |||||||
| June 29, 2024 |
| July 1, 2023 | ||||
Balance at the beginning of the fiscal year | $ | | $ | | |||
Adjustments to reserve |
| |
| | |||
Less: Settlements made (in cash or in kind) |
| ( |
| ( | |||
Balance at the end of the fiscal quarter | $ | | $ | |
8. LEASES
For leases with initial terms greater than 12 months, the Company considers these right-of-use assets and records the related asset and obligation at the present value of lease payments over the term. For leases with initial terms equal to or less than 12 months, the Company does not consider them as right-of-use assets and instead considers them short-term lease costs that are recognized on a straight-line basis over the lease term. The Company’s leases may include escalation clauses, renewal options, and/or termination options that are factored into the Company’s determination of lease term and lease payments when it is reasonably certain the option will be exercised. The Company elected to take the practical expedient and not separate lease and non-lease components of contracts. The Company estimates an incremental borrowing rate to discount the lease payments based on information available at lease commencement because the implicit rate of the lease is generally not known.
The Company leases manufacturing facilities, office space, land, and certain vehicles and equipment under operating leases. The Company also leases certain vehicles and equipment under finance leases. The Company determines if an arrangement is a lease at
16
inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
The components of lease expense for the fiscal quarter and two fiscal quarters ended June 29, 2024 and July 1, 2023 were as follows (in thousands):
Fiscal Quarter Ended | Two Fiscal Quarters Ended | ||||||||||||
| June 29, 2024 |
| July 1, 2023 | June 29, 2024 |
| July 1, 2023 | |||||||
Operating lease expense | $ | | $ | | $ | | $ | | |||||
Finance lease amortization of assets | | | | | |||||||||
Finance lease interest on lease liabilities | | | | | |||||||||
Short-term lease expense |
| |
| |
| |
| | |||||
Variable lease expense |
| |
| |
| |
| | |||||
Total lease expense | $ | | $ | | $ | | $ | |
Operating and finance lease right-of-use assets and lease-related liabilities as of June 29, 2024 and December 31, 2023 were as follows (in thousands):
June 29, 2024 | December 31, 2023 | Classification | ||||||
Lease right-of-use assets: | ||||||||
Operating leases | $ | | $ | | Operating lease right-of-use assets | |||
Finance leases | | | ||||||
Total lease right-of-use assets | $ | | $ | | ||||
Lease-related liabilities | ||||||||
Current | ||||||||
Operating leases | $ | | $ | | Current operating lease liabilities | |||
Finance leases | | | ||||||
Non-current | ||||||||
Operating leases | | | Non-current operating lease liabilities | |||||
Finance leases | | | ||||||
Total lease liabilities | $ | | $ | |
The table below presents supplemental information related to leases as of June 29, 2024 and December 31, 2023:
| June 29, 2024 | December 31, 2023 | ||||||
Weighted-average remaining lease term (years) | ||||||||
Finance leases | ||||||||
Operating leases | ||||||||
Weighted-average discount rate | ||||||||
Finance leases | | % | | % | ||||
Operating leases | | % | | % |
The table below presents supplemental information related to the cash flows for operating leases recorded on the condensed consolidated statements of cash flows (in thousands):
Two Fiscal Quarters Ended | |||||||
| June 29, 2024 |
| July 1, 2023 | ||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||
Operating cash flows for operating leases | $ | | $ | |
17
The following table summarizes fiscal year maturities of operating lease liabilities as of June 29, 2024 (in thousands):
| Operating Leases | Finance Leases | Total | ||||||
Remainder of fiscal year 2024 | $ | | $ | | $ | | |||
2025 | | | | ||||||
2026 | | | | ||||||
2027 | | | | ||||||
2028 | | | | ||||||
Thereafter | | | | ||||||
Total lease payments | | | | ||||||
Less: Interest | ( | ( | ( | ||||||
Present value of lease liability | $ | | $ | | $ | |
9. NET SALES
The following table sets forth the Company’s disaggregation of net sales by product line (in thousands):
Fiscal Quarter Ended | Two Fiscal Quarters Ended | ||||||||||||
| June 29, 2024 |
| July 1, 2023 | June 29, 2024 |
| July 1, 2023 | |||||||
In-ground Swimming Pools | $ | | $ | | $ | | $ | | |||||
Covers |
| |
| |
| |
| | |||||
Liners |
| |
| |
| |
| | |||||
$ | | $ | | $ | | $ | |
10. INCOME TAXES
The effective income tax rate for the fiscal quarter and two fiscal quarters ended June 29, 2024 was
11. STOCKHOLDERS’ EQUITY
Repurchase Program
On May 10, 2022, the Board of Directors of the Company approved a stock repurchase program (the “Repurchase Program”), which authorizes the Company to repurchase up to $
As of June 29, 2024, $
12. STOCK-BASED COMPENSATION
On April 12, 2021, the Company’s stockholders approved the 2021 Omnibus Equity Incentive Plan (the “2021 Omnibus Equity Plan”), which became effective on April 22, 2021. The 2021 Omnibus Equity Plan provides for the issuance of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock units and other stock-based and cash-based awards. The maximum grant date fair value of cash and equity awards that may be awarded to a
18
non-employee director under the 2021 Omnibus Equity Plan during any one fiscal year, together with any cash fees paid to such non-employee director during such fiscal year, is $
On May 2, 2023, at the 2023 annual meeting of stockholders of the Company, the stockholders approved the first amendment (the “First Amendment”) to the 2021 Omnibus Equity Plan, which was previously approved by the Board of Directors of the Company. The First Amendment became effective upon stockholder approval, and included an increase by
Except as amended by the First Amendment, the other terms of the 2021 Omnibus Equity Plan remain in full force and effect. Subsequent to the First Amendment, the maximum aggregate number of shares reserved for issuance under the 2021 Omnibus Equity Plan is
The following table summarizes the Company’s stock-based compensation expense (in thousands):
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||||
| June 29, 2024 |
| July 1, 2023 | June 29, 2024 |
| July 1, 2023 | ||||||||
Cost of sales | $ | | $ | ( | $ | | $ | ( | ||||||
Selling, general, and administrative |
| |
| |
| |
| | ||||||
$ | | $ | | $ | | $ | |
As of June 29, 2024, total unrecognized stock-based compensation expense related to all unvested stock-based awards was $
Restricted Stock Awards
The following table represents the Company’s restricted stock awards activity during the two fiscal quarters ended June 29, 2024:
Weighted- | |||||
Average Grant- | |||||
| Shares |
| Date Fair Value | ||
Outstanding at January 1, 2024 |
| | $ | | |
Granted |
|
| |||
Vested |
| ( |
| | |
Forfeited |
| |
| | |
Outstanding at June 29, 2024 |
| | $ | |
Restricted Stock Units
The following table represents the Company’s restricted stock units activity during the two fiscal quarters ended June 29, 2024:
|
| Weighted- | |||
Average Grant- | |||||
Shares | Date Fair Value | ||||
Outstanding at January 1, 2024 |
| | $ | | |
Granted |
| |
| | |
Vested |
| ( |
| | |
Forfeited |
| ( |
| | |
Outstanding at June 29, 2024 |
| | $ | |
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Stock Options
The following table represents the Company’s stock options activity during the two fiscal quarters ended June 29, 2024:
| Weighted- |
| Weighted- |
| ||||||
Average | Average | |||||||||
Exercise Price | Remaining | Aggregate | ||||||||
| Shares |
| per Share |
| Contract Term |
| Intrinsic Value | |||
|
| (in years) | (in thousands) | |||||||
Outstanding at January 1, 2024 |
| | $ | |
| |||||
Granted |
| | |
|
|
|
| |||
Exercised |
| |
| |
|
|
|
| ||
Forfeited |
| ( |
| |
|
|
|
| ||
Expired | ( | | ||||||||
Outstanding at June 29, 2024 |
| | $ | |
| $ | | |||
Vested and expected to vest at June 29, 2024 |
| | $ | |
| $ | | |||
Options exercisable at June 29, 2024 |
| | $ | |
| $ | |
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock.
Stock Appreciation Rights
During the fiscal quarter ended April 1, 2023, as a portion of the annual equity award grants to the Company’s executive officers, the Compensation Committee of the Board of Directors approved stock appreciation rights for an aggregate of
The following table represents the Company’s stock appreciation rights activity during the two fiscal quarters ended June 29, 2024:
| Weighted- |
| Weighted- |
| ||||||
Average | Average | |||||||||
Exercise Price | Remaining | Aggregate | ||||||||
| Shares |
| per Share |
| Contract Term |
| Intrinsic Value | |||
|
| (in years) | (in thousands) | |||||||
Outstanding at January 1, 2024 |
| | $ | |
| |||||
Granted |
| | |
|
|
|
| |||
Exercised |
| |
| |
|
|
|
| ||
Forfeited |
| ( |
| |
|
|
|
| ||
Outstanding at June 29, 2024 |
| | $ | |
| $ | | |||
Vested and expected to vest at June 29, 2024 |
| | $ | |
| $ | | |||
Stock appreciation rights exercisable at June 29, 2024 |
| | $ | |
| $ | |
The aggregate intrinsic value of stock appreciation rights is calculated as the difference between the strike price of the stock appreciation rights and the fair value of the Company’s common stock for those stock appreciation rights that had strike prices lower than the fair value of the Company’s common stock.
20
Performance Stock Units
During the two fiscal quarters ended June 29, 2024, the Compensation Committee of the Board of Directors approved the grant of performance stock units (“PSUs”) as a portion of the annual equity award to the Company’s executive officers.
The PSUs will be earned at
The following table represents the Company’s PSU activity during the two fiscal quarters ended June 29, 2024:
|
| Weighted- | |||
| Average | ||||
| Grant Date | ||||
| Shares |
|
| Fair Value | |
|
| ||||
Outstanding at January 1, 2024 |
| | $ | | |
Granted |
| | | ||
Adjustment for expected performance achievement (1) |
| | | ||
Forfeited |
| | | ||
Outstanding at June 29, 2024 (2) |
| | $ | |
(1)Represents the adjustment to previously granted PSUs based on the Company’s performance expectations as of June 29, 2024.
(2)An additional
13. NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share attributable to common stockholders was calculated as follows (in thousands, except share and per share data):
Fiscal Quarter Ended | Two Fiscal Quarters Ended | ||||||||||||
| June 29, 2024 |
| July 1, 2023 |
| June 29, 2024 |
| July 1, 2023 | ||||||
Numerator: |
|
|
|
| |||||||||
Net income (loss) attributable to common stockholders | $ | | $ | | $ | | $ | ( | |||||
Denominator: |
|
|
|
|
|
|
| ||||||
Weighted-average common shares outstanding |
| ||||||||||||
Basic | | | | | |||||||||
Diluted | | | | | |||||||||
Net income (loss) per share attributable to common stockholders: | |||||||||||||
Basic | $ | | $ | | $ | | $ | ( | |||||
Diluted | $ | | $ | | $ | | $ | ( | |||||
As of June 29, 2024 and December 31, 2023,
21
The following table includes the number of shares that may be dilutive common shares in the future that were not included in the computation of diluted net income (loss) per share because the effect was anti-dilutive:
| Fiscal Quarter Ended |
| Two Fiscal Quarters Ended | ||||||
| June 29, 2024 |
| July 1, 2023 | June 29, 2024 |
| July 1, 2023 | |||
Restricted stock awards | |
| |
| |
| | ||
Restricted stock units | |
| |
| |
| | ||
Stock options | |
| |
| |
| | ||
Stock appreciation rights | | | | | |||||
Performance stock units | | | | |
14. RELATED PARTY TRANSACTIONS
BrightAI Services
Starting in 2020, BrightAI Corporation (“BrightAI”) has rendered services to the Company, for which the cost has been capitalized as internal-use software. A co-founder of BrightAI served on the Company’s Board of Directors from December 9, 2020 until his resignation on February 21, 2024. In December 2022, the Company executed an additional agreement with BrightAI for the provision of hardware to run the technology developed by BrightAI and the Company. During the two fiscal quarters ended June 29, 2024 and July 1, 2023, the Company incurred no material amounts and $
15. RESTRUCTURING COSTS
During the second and third fiscal quarters of 2023, the Company initiated an additional plan focused on efforts to improve efficiencies and decrease costs. The plan involved a reduction in the Company’s workforce as well as closures of various manufacturing facilities. The Company had an exit or disposal cost related liability of less than $
16. SUBSEQUENT EVENT
On August 2, 2024, the Company completed a stock acquisition of CoverStar Central, LLC. (“CoverStar Central”), the Company’s exclusive dealer of automatic safety covers in 29 states – mainly in the center of the U.S. The purchase price was $
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our 2023 Annual Report on Form 10-K filed with the Securities and Exchange Commission, (“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, 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. These statements involve known and unknown risks, uncertainties, assumptions and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including those set forth under “Risk Factors,” “Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in the Annual Report and as described in other subsequent reports we file or furnish with the SEC, including elsewhere in this Quarterly Report on Form 10-Q. For similar reasons, our past results may not be a reliable indicator of future performance and trends. We encourage you to read this report and our other filings with the SEC carefully. You also should be aware that these risk factors and other information do not describe every risk that we face. New emerging risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business, financial condition, results of operations and cash flows. We operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. Although we believe that the expectations reflected in the forward-looking statements are reasonable and our expectations based on third-party information and projections are from sources that management believes to be reputable, we cannot guarantee future results, levels of activities, performance, or achievements.
These forward-looking statements reflect our views with respect to future events as of the date of this Quarterly Report on Form 10-Q or the date specified herein, and we have based these forward-looking statements on our current expectations and projections about future events and trends. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. Our forward-looking statements further do not reflect the potential impact of any future acquisitions, merger, dispositions, joint ventures, or investments we may undertake. We qualify all of our forward-looking statements by these cautionary statements.
23
Overview
We are the largest designer, manufacturer, and marketer of in-ground residential swimming pools in North America, Australia, and New Zealand. We hold the leading position in North America in every product category in which we compete. It is our view that we are the most sought-after brand in the pool industry and the only pool company that has established a direct relationship with the homeowner. We are Latham, The Pool Company.
With an operating history that spans over 65 years, we offer the industry’s broadest portfolio of pools and related products, including in-ground swimming pools, pool liners, and pool covers.
We have a heritage of innovation. In an industry that has traditionally marketed on a business-to-business basis (pool manufacturer to dealer), we pioneered the first “direct-to-homeowner” digital and social marketing strategy that has transformed the homeowner’s purchase journey. Through this marketing strategy, we are able to create demand for our pools and to provide high quality, purchase-ready consumer leads to our dealer partners.
Partnership with our dealers is integral to our collective success, and we have enjoyed long-tenured relationships averaging over 14 years. We support our dealer network with business development tools, co-branded marketing programs, and in-house training, as well as an operations platform consisting of approximately 1,800 employees across 24 locations.
The full resources of our company are dedicated to designing and manufacturing high-quality pool products, with the homeowner in mind, and positioning ourselves as a value-added partner to our dealers.
We conduct our business as one operating and reportable segment that designs, manufactures, and markets in-ground swimming pools, pool liners, and pool covers.
Recent Developments
Highlights for the fiscal quarter ended 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%. |
24
Business Update
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.
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, technology and systems. 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.
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
Net Sales
We derive our revenue from the design, manufacture, and sale of in-ground swimming pools, pool covers, and pool liners. We sell fiberglass pools, which are one-piece manufactured fiberglass pools that are ready to be installed in a consumer’s backyard, and custom vinyl pools, which are manufactured pools that are made out of non-corrosive steel, aluminum, or composite polymer frame, on top of which a vinyl liner is installed. We sell liners for the interior surface of vinyl pools (including pools that were not manufactured by us). We also sell all-season covers, which are winterizing mesh or solid pool covers that protect pools against debris and cold or inclement weather, and automatic safety covers for pools that can be operated with a switch.
Our sales are made through one-step and two-step business-to-business distribution channels. In our one-step distribution channel, we sell our products directly to dealers who, in turn, sell our products to consumers. In our two-step distribution channel, we sell our products to distributors who warehouse our products and sell them on to dealers, who ultimately sell our products to consumers.
Each product shipped is considered to be one performance obligation. With the exception of our extended service warranties and our custom product contracts, we recognize our revenue when control of our promised goods is transferred to our customers (dealer in one-step distribution channel or distributor in two-step distribution channel), either upon shipment or arrival at our customer’s destination depending upon the terms of the purchase order. Sales are recognized net of any estimated rebates, returns, allowances, cash discounts, or other sales incentives. Revenue that is derived from our extended service warranties, which are separately priced and sold, is recognized over the term of the contracts. Revenue from custom products is recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation.
25
Gross Margin
Gross margin is gross profit as a percentage of our net sales. Gross margin depends upon several factors, such as the prices we charge buyers, changes in prices of raw materials, the volume and relative sales mix among product lines, and plant performance, among other factors. Gross margin is also impacted by the costs of distribution and occupancy costs, which can vary.
Our gross profit is primarily variable in nature and generally follows changes in net sales. The components of our cost of sales may not be comparable to the components of cost of sales or similar measures of other companies. As a result, our gross profit and gross margin may not be comparable to similar data made available by other companies.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA and Adjusted EBITDA margin are key metrics used by management and our Board of Directors to assess our financial performance. Adjusted EBITDA and Adjusted EBITDA margin are also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures. We use Adjusted EBITDA and Adjusted EBITDA margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to utilize as a significant performance metric in our incentive compensation plans, and to compare our performance against that of other companies using similar measures. We have presented Adjusted EBITDA and Adjusted EBITDA margin solely as supplemental disclosures because we believe they allow for a more complete analysis of results of operations and assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, such as (i) depreciation and amortization, (ii) interest expense, net, (iii) income tax (benefit) expense, (iv) loss (gain) on sale and disposal of property and equipment, (v) restructuring charges, (vi) stock-based compensation expense, (vii) unrealized (gains) losses on foreign currency transactions, (viii) strategic initiative costs, (ix) acquisition and integration related costs, (x) the Odessa fire and other such unusual events and (xi) other.
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and should not be considered as alternatives to net income (loss) as a measure of financial performance or any other performance measure derived in accordance with GAAP, and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA and Adjusted EBITDA margin, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. There can be no assurance that we will not modify the presentation of Adjusted EBITDA and Adjusted EBITDA margin in the future, and any such modification may be material. Our presentation of Adjusted EBITDA and Adjusted EBITDA margin should not be construed to imply that our future results will be unaffected by any such adjustments. In addition, other companies, including companies in our industry, may not calculate Adjusted EBITDA and Adjusted EBITDA margin at all or may calculate Adjusted EBITDA and Adjusted EBITDA margin differently and accordingly, are not necessarily comparable to similarly entitled measures of other companies, which reduces the usefulness of Adjusted EBITDA and Adjusted EBITDA margin as tools for comparison.
For a discussion of Adjusted EBITDA and Adjusted EBITDA margin and the limitations on their use, and the reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure, and our calculation of Adjusted EBITDA margin see “— Non-GAAP Financial Measures” below.
26
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 |
| |||||||||||||||
% of Net | % of Net | Change | Change in % |
| ||||||||||||
| June 29, 2024 |
| Sales |
| July 1, 2023 |
| Sales |
| Amount |
| of Net Sales |
| ||||
(dollars in thousands) |
| |||||||||||||||
Net sales | $ | 160,122 | 100.0 | % | $ | 177,128 | 100.0 | % | $ | (17,006) | 0.0 | % | ||||
Cost of sales |
| 107,100 |
| 66.9 | % |
| 126,895 |
| 71.6 | % |
| (19,795) |
| (4.7) | % | |
Gross profit |
| 53,022 |
| 33.1 | % |
| 50,233 |
| 28.4 | % |
| 2,789 |
| 4.7 | % | |
| ||||||||||||||||
Selling, general, and administrative expense |
| 26,588 |
| 16.6 | % |
| 30,209 |
| 17.1 | % |
| (3,621) |
| (0.5) | % | |
Amortization |
| 6,428 |
| 4.0 | % |
| 6,635 |
| 3.7 | % |
| (207) |
| 0.3 | % | |
Income from operations |
| 20,006 |
| 12.5 | % |
| 13,389 |
| 7.6 | % |
| 6,617 |
| 4.9 | % | |
Other expense (income): |
|
|
|
|
|
|
| |||||||||
Interest expense, net |
| 6,013 |
| 3.8 | % |
| 4,486 |
| 2.5 | % |
| 1,527 |
| 1.3 | % | |
Other expense (income), net |
| 804 |
| 0.5 | % |
| (1,036) |
| (0.6) | % |
| 1,840 |
| 1.1 | % | |
Total other expense, net |
| 6,817 |
| 4.3 | % |
| 3,450 |
| 1.9 | % |
| 3,367 |
| 2.4 | % | |
Earnings from equity method investment |
| 532 |
| 0.4 | % |
| 660 |
| 0.3 | % |
| (128) |
| 0.1 | % | |
Income before income taxes |
| 13,721 |
| 8.6 | % |
| 10,599 |
| 6.0 | % |
| 3,122 |
| 2.6 | % | |
Income tax expense |
| 442 |
| 0.3 | % |
| 4,884 |
| 2.8 | % |
| (4,442) |
| (2.5) | % | |
Net income | $ | 13,279 |
| 8.3 | % | $ | 5,715 |
| 3.2 | % | $ | 7,564 |
| 5.1 | % | |
Adjusted EBITDA(a) | $ | 34,478 |
| 21.5 | % | $ | 30,999 |
| 17.5 | % | $ | 3,479 |
| 4.0 | % |
________________________________________
(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
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 $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.
27
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
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 $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 $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 June 29, 2024 and July 1, 2023 was primarily attributable to the impacts of stock-based compensation expense and foreign income.
Net 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 $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
28
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 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.
29
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 |
| |||||||||||||||
% of Net | % of Net | Change | Change in % |
| ||||||||||||
| June 29, 2024 |
| Sales |
| July 1, 2023 |
| Sales |
| Amount |
| of Net Sales |
| ||||
| (dollars in thousands) | |||||||||||||||
Net sales | $ | 270,751 |
| 100.0 | % | $ | 314,847 |
| 100.0 | % | $ | (44,096) |
| 0.0 | % | |
Cost of sales |
| 187,140 |
| 69.1 | % |
| 231,244 |
| 73.4 | % |
| (44,104) |
| (4.3) | % | |
Gross profit |
| 83,611 |
| 30.9 | % |
| 83,603 |
| 26.6 | % |
| 8 |
| 4.3 | % | |
| ||||||||||||||||
Selling, general, and administrative expense |
| 52,838 |
| 19.5 | % |
| 63,266 |
| 20.1 | % |
| (10,428) |
| (0.6) | % | |
Amortization |
| 12,840 |
| 4.8 | % |
| 13,267 |
| 4.3 | % |
| (427) |
| 0.5 | % | |
Income from operations |
| 17,933 |
| 6.6 | % |
| 7,070 |
| 2.2 | % |
| 10,863 |
| 4.4 | % | |
Other expense (income): |
|
|
|
|
|
|
|
|
| |||||||
Interest expense, net |
| 10,995 |
| 4.1 | % |
| 15,290 |
| 4.9 | % |
| (4,295) |
| (0.8) | % | |
Other expense (income), net |
| 2,390 |
| 0.8 | % |
| (826) |
| (0.3) | % |
| 3,216 |
| 1.1 | % | |
Total other expense, net |
| 13,385 |
| 4.9 | % |
| 14,464 |
| 4.6 | % |
| (1,079) |
| 0.3 | % | |
Earnings from equity method investment |
| 1,841 |
| 0.7 | % |
| 697 |
| 0.3 | % |
| 1,144 |
| 0.4 | % | |
Income (loss) before income taxes |
| 6,389 |
| 2.4 | % |
| (6,697) |
| (2.1) | % |
| 13,086 |
| 4.5 | % | |
Income tax expense |
| 974 |
| 0.4 | % |
| 1,956 |
| 0.6 | % |
| (982) |
| (0.2) | % | |
Net income (loss) | $ | 5,415 |
| 2.0 | % | $ | (8,653) |
| (2.7) | % | $ | 14,068 |
| 4.7 | % | |
Adjusted EBITDA(a) | $ | 46,770 |
| 17.3 | % | $ | 42,032 |
| 13.3 | % | $ | 4,738 |
| 4.0 | % |
Net Sales
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-
30
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
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.
31
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.
32
Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA and Adjusted EBITDA margin are key metrics used by management and our Board of Directors to assess our financial performance. Adjusted EBITDA and Adjusted EBITDA margin are also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures. We use Adjusted EBITDA and Adjusted EBITDA margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to utilize as a significant performance metric in our incentive compensation plans, and to compare our performance against that of other companies using similar measures. We have presented Adjusted EBITDA and Adjusted EBITDA margin solely as supplemental disclosures because we believe they allow for a more complete analysis of results of operations and assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, such as (i) depreciation and amortization, (ii) interest expense, 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.
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and should not be considered as alternatives to net income (loss) as a measure of financial performance or any other performance measure derived in accordance with GAAP, and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA and Adjusted EBITDA margin, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. There can be no assurance that we will not modify the presentation of Adjusted EBITDA and Adjusted EBITDA margin in the future, and any such modification may be material. Our presentation of Adjusted EBITDA and Adjusted EBITDA margin should not be construed to imply that our future results will be unaffected by any such adjustments. In addition, other companies, including companies in our industry, may not calculate Adjusted EBITDA and Adjusted EBITDA margin at all or may calculate Adjusted EBITDA and Adjusted EBITDA margin differently and accordingly, are not necessarily comparable to similarly entitled measures of other companies, which reduces the usefulness of Adjusted EBITDA and Adjusted EBITDA margin as tools for comparison.
Adjusted EBITDA and Adjusted EBITDA margin have their limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Adjusted EBITDA and Adjusted EBITDA margin:
● | do not reflect every expenditure, future requirements for capital expenditures or contractual commitments; |
● | do not reflect changes in our working capital needs; |
● | do not reflect the interest expense, or the amounts necessary to service interest or principal payments, on our outstanding debt; |
● | do not reflect income tax (benefit) expense, and because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and ability to operate; |
● | do not reflect non-cash stock-based compensation, which will remain a key element of our overall compensation package; and |
● | do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations. |
Although depreciation and amortization are eliminated in the calculation of Adjusted EBITDA and Adjusted EBITDA margin, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA and Adjusted EBITDA margin do not reflect any costs of such replacements.
33
Management compensates for these limitations by primarily relying on our GAAP results, while using Adjusted EBITDA and Adjusted EBITDA margin as supplements to the corresponding GAAP financial measures.
The following table provides a reconciliation of our net income (loss) to Adjusted EBITDA for the periods presented and the calculation of Adjusted EBITDA margin:
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||
June 29, 2024 |
| July 1, 2023 |
| June 29, 2024 |
| July 1, 2023 | ||||||
(dollars in thousands) | ||||||||||||
Net income (loss) | $ | 13,279 | $ | 5,715 | $ | 5,415 | $ | (8,653) | ||||
Depreciation and amortization | 10,593 | 10,026 | 20,967 | 19,284 | ||||||||
Interest expense, net | 6,013 | 4,486 | 10,995 | 15,290 | ||||||||
Income tax expense | 442 | 4,884 | 974 | 1,956 | ||||||||
Loss on sale and disposal of property and equipment | 65 | 5 | 77 | 13 | ||||||||
Restructuring charges(a) | 47 | 278 | 365 | 797 | ||||||||
Stock-based compensation expense(b) | 2,100 | 5,764 | 3,343 | 12,533 | ||||||||
Unrealized losses (gains) on foreign currency transactions(c) | 806 | (1,198) | 2,390 | (468) | ||||||||
Strategic initiative costs(d) | 851 | 935 | 1,974 | 2,002 | ||||||||
Acquisition and integration related costs(e) | 375 | — | 375 | 11 | ||||||||
Odessa fire(f) | — | 93 | — | (771) | ||||||||
Other(g) | (93) | 11 | (105) | 38 | ||||||||
Adjusted EBITDA | $ | 34,478 | $ | 30,999 | $ | 46,770 | $ | 42,032 | ||||
Net sales | $ | 160,122 | $ | 177,128 | $ | 270,751 | $ | 314,847 | ||||
Net income (loss) margin |
| 8.3 | % |
| 3.2 | % |
| 2.0 | % |
| (2.7) | % |
Adjusted EBITDA margin |
| 21.5 | % |
| 17.5 | % |
| 17.3 | % |
| 13.3 | % |
(a) Represents costs related to a cost reduction plan that includes severance and other costs for our executive management changes and additional costs related to our cost reduction plans, which include further actions to reduce our manufacturing overhead by reducing headcount in addition to facility shutdowns.
(b) Represents non-cash stock-based compensation expense.
(c) Represents unrealized foreign currency transaction losses associated with our international subsidiaries.
(d) Represents fees paid to external consultants and other expenses for our strategic initiatives.
(e) Represents acquisition and integration costs as well as other costs related to potential transactions.
(f) Represents costs incurred and insurance recoveries related to a production facility fire in Odessa, Texas.
(g) Other costs consist of other discrete items as determined by management, primarily including (i) fees paid to external advisors for various matters and (ii) other items.
34
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are net cash provided by operating activities and availability under our Revolving Credit Facility (as defined below). Historically, we have funded working capital requirements, capital expenditures, payments related to acquisitions, and debt service requirements with internally generated cash on hand, borrowings under our credit facilities, and the issuance of shares of our common stock. Our primary cash needs are to fund working capital, capital expenditures, debt service requirements, any acquisitions, or investments we may undertake, and any share repurchases we may make.
As of 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, storage, and delivery equipment. We are in the midst of a multi-year capital plan to invest in our facilities, technology, and systems.
We believe that our existing cash, cash generated from operations and availability under our Revolving Credit Facility will be adequate to fund our operating expenses and capital expenditure requirements over the next 12 months, as well as our longer-term liquidity needs. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We may issue debt or equity securities, which may provide an additional source of liquidity. However, there can be no assurance equity or debt financing will be available to us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders.
Our Indebtedness
On February 23, 2022, Latham Pool Products, Inc. (“Latham Pool Products”), our wholly owned subsidiary, entered into an agreement (the “Credit Agreement”) with Barclays Bank PLC, which provides a senior secured multicurrency revolving line of credit in an initial principal amount of $75.0 million (the “Revolving Credit Facility”) and a U.S. Dollar senior secured term loan (the “Term Loan”) in an initial principal amount of $325.0 million (the “Refinancing”). On such date, proceeds under the Credit Agreement were used to repay and replace $294.0 million under, and terminate, the previous credit agreement and for general corporate purposes.
As of 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 Pool Products to borrow loans in U.S. Dollars, Canadian Dollars, Euros and Australian Dollars. The Revolving Credit Facility matures on February 23, 2027. Loans outstanding under the Revolving Credit Facility denominated in U.S. Dollars and Canadian Dollars bear interest, at the borrower’s option, at a rate per annum based on Term SOFR or CDO (each, as defined in the Credit Agreement), as applicable, plus a margin of 3.50%, or at a rate per annum based on the Base Rate or the Canadian Prime Rate (each, as defined in the Credit Agreement), plus a margin of 2.50%. Loans outstanding under the Revolving Credit Facility denominated in Euros or Australian Dollars bear interest based on EURIBOR or the AUD Rate (each, as defined in the Credit Agreement), respectively, plus a margin of 3.50%. A commitment fee accrues on any unused portion of the commitments under the Revolving Credit Facility. The commitment fee is due and payable quarterly in arrears, and initially was 0.375% per annum and thereafter accrues at a rate per annum ranging from 0.25% to 0.50%, depending on the First Lien Net Leverage Ratio (as defined in the Credit Agreement). The Revolving Credit Facility is not subject to amortization.
35
We are also required to meet certain financial covenants, including maintaining specific liquidity measurements. There are also negative covenants, including certain restrictions on our ability and the ability of our subsidiaries to incur additional indebtedness, create liens, make investments, consolidate, or merge with other entities, enter into transactions with affiliates, make prepayments with respect to certain indebtedness, make dividend payments, loans, or advances to the Company, declare dividends and make restricted payments and other distributions.
As of June 29, 2024, we had no outstanding borrowings under the Revolving Credit Facility and $75.0 million was available for future borrowing.
Term Loan
The Term Loan matures on February 23, 2029. Loans outstanding under the Term Loan bear interest, at the borrower’s option, at a rate per annum based on Term SOFR (as defined in the Credit Agreement), plus a margin ranging from 3.75% to 4.00%, depending on the First Lien Net Leverage Ratio, or based on the Base Rate (as defined in the Credit Agreement), plus a margin ranging from 2.75% to 3.00%, depending on the First Lien Net Leverage Ratio. Loans under the Term Loan are subject to scheduled quarterly amortization payments equal to 0.25% of the initial principal amount of the Term Loan.
The obligations under the Credit Agreement are guaranteed by certain of our wholly owned subsidiaries 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 June 29, 2024, we had $282.4 million of outstanding borrowings under the Term Loan.
Share Repurchase Program
On May 10, 2022, our Board of Directors approved a stock repurchase program (the “Repurchase Program”), which authorizes us to repurchase up to $100 million of our shares of common stock by May 2025. We may effect these repurchases in open market transactions, privately negotiated purchases or other acquisitions. We are not obligated to repurchase any of our outstanding shares under the Repurchase Program and the timing and amount of any repurchases will depend on market conditions, our stock price, alternative uses of capital, the terms of our debt instruments and other factors. We did not repurchase any shares of our common stock during the fiscal quarter ended June 29, 2024. As of June 29, 2024, $77.0 million remained available for share repurchases pursuant to our Repurchase Program.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented:
Two Fiscal Quarters Ended | ||||||
June 29, 2024 |
| July 1, 2023 | ||||
(in thousands) | ||||||
Net cash provided by operating activities | $ | 17,911 | $ | 36,289 | ||
Net cash used in investing activities |
| (9,833) |
| (23,365) | ||
Net cash used in financing activities |
| (20,005) |
| (1,884) | ||
Effect of exchange rate changes on cash |
| (68) |
| (550) | ||
Net (decrease) increase in cash | $ | (11,995) | $ | 10,490 |
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Operating Activities
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 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. The changes in accrued expenses and other current liabilities and accounts payable were primarily driven by volume of purchases and timing of payments.
Investing Activities
During the 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. 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. 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.
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.
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
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and expenses during the reporting period. Our critical accounting policies and estimates are described below and under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report and Note 2 to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q. These estimates are based on historical results, trends, and other assumptions we believe to be reasonable. We evaluate these estimates on an ongoing basis. Actual results may differ from estimates.
Impairment of Goodwill
We evaluate goodwill for impairment at least annually, or more frequently when events or changes in circumstances indicate that the carrying value may not be recoverable. We have selected the first day of the fourth fiscal quarter to perform our annual goodwill impairment testing.
We may assess our goodwill for impairment initially using a qualitative approach, or step zero, to determine whether conditions exist to indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value. The qualitative assessment requires significant judgments by management about economic conditions including the entity’s operating environment, its industry and other market considerations, entity-specific events related to financial performance or loss of key personnel, and other events that could impact the reporting unit. If management concludes, based on assessment of relevant events, facts, and circumstances, that it is more likely than not that the reporting unit’s fair value is greater than its carrying value, no further impairment testing is required.
If our assessment of qualitative factors indicates that it is more likely than not that the fair value of the reporting unit is less than its carrying value, then a quantitative assessment is performed. We may also elect to initially perform a quantitative analysis instead of starting with step zero. The quantitative analysis requires comparing the carrying value of the reporting unit, including goodwill, to its fair value. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and no further testing is required. If the carrying amount of the reporting unit exceeds its fair value, there is an impairment of goodwill and an impairment loss is recorded. We calculate the impairment loss by comparing the fair value of the reporting unit less the carrying value, including goodwill. The maximum goodwill impairment is the carrying value of the goodwill.
The qualitative factors we assessed as part of our annual impairment testing included economic conditions, industry and market considerations, cost factors, overall financial performance, and other entity specific events. In addition, we considered our market capitalization based on quoted market prices of our securities on the Nasdaq Global Select Market, adjusted for the effect of a control premium as contemplated by ASC 350.
Based on the results of the quantitative assessment performed for our one reporting unit, we determined that goodwill was not impaired at October 1, 2023. However, if factors exist that could indicate an impairment in the future, including a sustained decrease in our stock price, we may be required to record impairment charges in future periods.
Recently Issued and Adopted Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential loss that may result from market changes associated with our business or with an existing or forecasted financial transaction. The value of a financial instrument may change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes. We are exposed to changes in interest rates and foreign currency exchange rates because we finance certain operations through variable rate debt instruments and denominate some of our transactions in foreign currencies. Changes in these rates may have an impact on future cash flow and earnings. We manage these risks through normal operating and financing activities.
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During the two fiscal quarters ended June 29, 2024, there have been no material changes to the information included under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report.
Interest Rate Risk
We entered into an additional interest rate swap that was executed on March 10, 2023. The swap has an effective date of May 18, 2023 and a termination date of May 18, 2026. Under the terms of the swap, we fixed our SOFR borrowing rate on a notional amount of $161.0 million. The interest rate swap is not designated as a hedging instrument for accounting purposes.
An increase or decrease of 1% in the effective interest rate, giving effect related to interest rate swaps, as of June 29, 2024, would cause an increase or decrease to annual interest expense, net of approximately $1.3 million.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 29, 2024. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of June 29, 2024.
Changes in Internal Control over Financial Reporting
Starting in the second quarter of 2024, as part of a multi-year implementation of a new enterprise resource planning (“ERP”) system, the Company began utilizing certain aspects of the new ERP system. Eventually, this ERP system will replace the existing core financial systems. The ERP system is designed to accurately maintain the Company’s financial records, enhance the flow of financial information, improve data management and provide timely information to its management team. The Company does not believe the changes implemented to date represent a material change in internal controls over financial reporting.
There were no other changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of a control system must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements related to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in litigation relating to claims arising out of our operations and businesses, including, among others, contract and employment claims, personal injury claims, intellectual property claims, product liability claims and warranty claims. Currently, there are no claims or proceedings against us that we believe will have a material adverse effect on our business, financial condition, results of operations or cash flows. Further, no material legal proceedings were terminated, settled, or otherwise resolved during the fiscal quarter ended June 29, 2024. However, the results of any current or future litigation cannot be predicted with certainty and, regardless of the outcome, we may incur significant costs and experience a diversion of management resources as a result of litigation.
Item 1A. Risk Factors
We have disclosed under the heading “Risk Factors” in our Annual Report, the risk factors that materially affect our business, financial condition, and results of operations. There have been no material changes from the risk factors previously disclosed in our Annual Report. You should carefully consider the risks, uncertainties, assumptions and other important factors set forth in the Annual Report and other subsequent reports we file or furnish with the SEC, including this Quarterly Report on Form 10-Q, any of which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied. For similar reasons, our past results may not be a reliable indicator of future performance and trends. You also should be aware that these risk factors and other information do not describe every risk that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may affect us. We operate in a very competitive and rapidly changing environment and new risks emerge from time to time, and we anticipate that subsequent events and developments will cause our views to change. In addition, these risks do not reflect the potential impact of any future acquisitions, merger, dispositions, joint ventures or investments we may undertake. Any of these known or emerging factors may materially adversely affect our business, financial condition, and operating results, as well as the trading price of our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 10, 2022, our Board of Directors approved a stock repurchase program, which authorizes us to repurchase up to $100.0 million of our shares of common stock by May 2025. We may effect these repurchases in open market transactions, privately negotiated purchases or other acquisitions. We are not obligated to repurchase any of our shares of our common stock under the 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. As of June 29, 2024, $77.0 million remained available for share repurchases pursuant to the repurchase program. We did not repurchase any shares of our common stock during the fiscal quarter ended June 29, 2024.
Item 5. Other Information
Rule 10b5-1 Trading Plans – Directors and Section 16 Officers
During the fiscal quarter ended June 29, 2024, none of the Company’s directors or Section 16 officers
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Item 6. Exhibits
Exhibit |
| |
No. | Description | |
3.1 | ||
3.2 | ||
31.1* | Certification of CEO, pursuant to SEC Rule 13a-14(a) and 15d-14(a) | |
31.2* | Certification of CFO, pursuant to SEC Rule 13a-14(a) and 15d-14(a) | |
32.1** | ||
32.2** | ||
101.INS* | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104* | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
* | Filed herewith. | |
** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 7, 2024
LATHAM GROUP, INC. | |
/s/ Oliver C. Gloe | |
Oliver C. Gloe | |
Chief Financial Officer | |
(Principal Financial Officer) |
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