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 final prospectus for our initial public offering filed pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, or the Securities Act, with theSecurities and Exchange Commission , orSEC , onApril 26, 2021 (the "Prospectus").
Cautionary Note Regarding Forward-Looking Statements
This discussion contains forward-looking statements that involve risk, assumptions and uncertainties, such as statements of our plans, objectives, expectations, intentions and forecasts. 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. Our actual results and the timing of selected events could differ materially from those discussed in these forward-looking statements as a result of several factors, including those set forth under the section of this Quarterly Report on Form 10-Q titled "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. These statements involve known and unknown risks, uncertainties 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. Important factors that could cause our results to vary from expectations include, but are not limited to secular shifts in consumer demand for swimming pools and spending on outdoor living spaces; slow pace of material conversion from concrete pools to fiberglass pools in the pool industry; general economic conditions and uncertainties affecting markets in which we operate and economic volatility that could adversely impact our business, including the COVID-19 pandemic; changes in access to consumer credit or increases in interest rates impacting consumers' ability to finance their purchases of pools; the impact of weather on our business; our ability to attract new customers and retain existing customers; our ability to sustain further growth and to manage it effectively; the ability of our suppliers to continue to deliver the quantity or quality of materials sufficient to meet our needs to manufacture our products; the availability and cost of third-party transportation services for our products and raw materials; product quality issues; our ability to successfully defend litigation brought against us; our ability to adequately obtain, maintain, protect and enforce our intellectual property and proprietary rights and claims of intellectual property and proprietary right infringement, misappropriation or other violation by competitors and third parties; failure to hire and retain qualified employees and personnel; exposure to risks associated with international sales and operations, including foreign currency exchange rates, corruption and instability; security breaches, cyber-attacks and other interruptions to our and our third-party service providers' technological and physical infrastructures; catastrophic events, including war, terrorism and other international conflicts, public health issues or natural catastrophes and accidents; risk of increased regulation of our operations, particularly related to environmental laws; fluctuations in our operating results; inability to compete successfully against current and future competitors; and other risks, uncertainties and factors set forth in this Quarterly Report on Form 10-Q, including those set forth under section titled "Risk Factors." These forward-looking statements reflect our views with respect to future events as of the date of this Quarterly Report on Form 10-Q and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q and, 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. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. Our forward-looking statements 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.
Overview
We are the largest designer, manufacturer and marketer of in-ground residential swimming pools inNorth America ,Australia and New Zealand . We hold the #1 market position inNorth America in every product category in which we compete. We believe that we are the most sought-after brand in the pool industry and the only pool company that has established a direct relationship with the homeowner. We are Latham,The Pool Company . 28
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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 generate and 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. In 2020, we sold to over 6,000 dealers; we also entered into a new and exclusive long-term strategic partnership with the nation's largest franchised dealer network. We support our dealer network with business development tools, co-branded marketing programs and in-house training, as well as a coast-to-coast operations platform consisting of over 2,000 employees across 32 facilities. The broad geographic reach of our manufacturing and distribution network allows us to deliver a fiberglass pool in a cost-effective manner to approximately 95% of theU.S. population in two days. No other competitor in the residential in-ground swimming pool industry has more than three manufacturing facilities. 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, liners and covers.
Recent Developments
Highlights for the fiscal quarter ended
Increase in net sales of 60.3%, or
? fiscal quarter ended
quarter ended
Increase in net loss of
? ended
quarter ended
fiscal quarter ended
Increase in Adjusted EBITDA (as defined below) of
? million for the fiscal quarter ended
for the fiscal quarter ended
Highlights for the two fiscal quarters ended
Increase in net sales of 101.1%, or
? two fiscal quarters ended
fiscal quarters ended
Increase in net loss of
? ended
quarter ended
fiscal quarters ended
Increase in Adjusted EBITDA (as defined below) of
? million for the fiscal quarter ended
for the fiscal quarter ended
Initial Public Offering
OnApril 27, 2021 , we completed our initial public offering (the "IPO") in which we sold 23,000,000 shares of common stock, inclusive of 3,000,000 shares sold by us pursuant to the full exercise of the underwriters' option to purchase additional shares. The aggregate net proceeds received by us from the IPO were$399.3 million , after deducting underwriting discounts and commissions and other offering costs. We used the net proceeds to (i) pay down$152.7 million of the Amended Term Loan (as defined below) under 29
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the Credit Agreement (as defined below), (ii) repay the
Contemporaneously with the pricing of the IPO, onApril 22, 2021 , we have put in place our Omnibus Incentive Plan, pursuant to which we granted to certain of our employees restricted stock awards, restricted stock units and option awards
(the "Omnibus Plan"). Reorganization Prior to the closing of the IPO, our parent entity,Latham Investment Holdings, LP ("Parent") merged with and intoLatham Group, Inc. , withLatham Group, Inc. surviving the merger (the "Reorganization"). The purpose of the Reorganization was to reorganize our structure so that our existing investors would own only common stock rather than limited partnership interests in our Parent. In connection with the Reorganization, 194,207,115 Class A units of our Parent ("Class A units") were converted into 97,187,596 shares of our common stock and 26,158,894 Class B units of our Parent were converted into 4,145,987 shares of common stock and 8,340,126 shares of restricted stock. The Reorganization was accounted for as a transaction between entities under common control and retrospectively applied startingDecember 2018 , the earliest period in which common control existed. Stock Split OnApril 13, 2021 , our Board of Directors approved a 109,673.709-for-one stock split of our common stock, par value$0.0001 . Accordingly, all share and per share data for all periods presented have been adjusted retroactively to reflect the impact of the amended certificate of incorporation and the stock split.
Charter Amendment
OnApril 13, 2021 , our certificate of incorporation was amended, which amended and restated certain terms of the certificate of incorporation. Under the amended certificate of incorporation, we had the authority to issue 500,000,000 shares of common stock, par value$0.0001 per share.
On
Key Performance Indicators
We derive our revenue from the design, manufacture and sale of in-ground swimming pools, pool covers and 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 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 and 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, 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, 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 30 Table of Contents
of the performance obligation. Custom products are generally delivered to the customer within three days of receipt of the purchase order.
Gross Margin
Gross margin is gross profit as a percentage of our net sales. Gross margin is dependent upon several factors, such as changes in prices of raw materials, the volume and relative sales mix among product lines, the average price of our products sold 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 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
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 establish our annual management incentive bonus plan compensation and to compare our performance against that of other peer companies using similar measures. We define Adjusted EBITDA as net income (loss) plus (i) depreciation and amortization, (ii) interest expense, (iii) income tax (benefit) expense, (iv) loss 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) other non-cash items, (ix) strategic initiative costs, (x) acquisition and integration related costs, (xi) other, (xii) IPO costs, and (xiii) COVID-19-related expenses (income). We believe excluding these items allows for better comparison of our financial results across reporting periods. We define Adjusted EBITDA margin as Adjusted EBITDA divided by net sales. Our definitions of Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to similarly titled measures of other companies.
For a discussion of Adjusted EBITDA and Adjusted EBITDA margin 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.
31 Table of Contents Results of Operations
Fiscal Quarter Ended
The following table summarizes our results of operations for the fiscal quarters
ended
Fiscal Quarter Ended % of Net % of Net Change Change % July 3, 2021 Sales June 27, 2020 Sales Amount of Net Sales (dollars in thousands)
Net sales$ 180,889 100.0 %$ 112,822 100.0 %$ 68,067 0.0 % Cost of sales 122,534 67.7 % 68,460 60.7 % 54,074 7.0 % Gross profit 58,355 32.3 % 44,362 39.3 % 13,993 (7.0) %
Selling, general and administrative expense 95,288 52.7 % 15,360 13.6 % 79,928 39.1 % Amortization 5,479 3.0 % 4,063 3.6 % 1,416 (0.6) % (Loss) income from operations (42,412) 23.4 % 24,939 22.1 % (67,351) 1.3 % Other expense (income): Interest expense 7,516 4.2 % 4,308 3.8 % 3,208 0.4 % Other (income) expense, net (794) 0.4 % (1,242) 1.1 % 448 (0.7) % Total other expense (income), net 6,722 3.7 % 3,066 2.7 % 3,656 1.0 % Earnings from equity method investment 754 0.4 % - 0.0 % 754 0.4 % (Loss) income before income taxes (48,380) 26.7 % 21,873 19.4 % (70,253) 7.3 % Income tax expense 5,218 2.9 % 5,459 4.8 % (241) (1.9) % Net (loss) income$ (53,598) 29.6 %$ 16,414 14.5 %$ (70,012) 15.1 % Adjusted EBITDA(a)$ 42,848 23.7 %$ 33,095 29.3 %$ 9,753 (5.6) %
(a)Adjusted EBITDA is a non-GAAP measure. See "Non-GAAP 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 was$180.9 million for the fiscal quarter endedJuly 3, 2021 , compared to$112.8 million for the fiscal quarter endedJune 27, 2020 . The$68.1 million , or 60.3%, increase in net sales was due to a$54.1 million increase from volume and a$14.0 million increase from pricing. The$54.1 million volume increase stemming from strong consumer demand for our products and continued growth in the number of new exclusive Latham Dealers and includes$18.2 million due to having three months of GLI's net sales in our net sales in the fiscal quarter endedJuly 3, 2021 . The increase in total net sales of$68.1 million across our product lines was$45.9 million for in-ground swimming pools,$12.8 million for liners and$9.4 million for covers.
Cost of Sales and Gross Margin
Cost of sales was$122.5 million for the fiscal quarter endedJuly 3, 2021 , compared to$68.5 million for the fiscal quarter endedJune 27, 2020 . Gross margin decreased by 7.0% to 32.3% of net sales for the fiscal quarter endedJuly 3, 2021 compared to 39.3% of net sales for the fiscal quarter endedJune 27, 2020 . The$54.0 million , or 79.0% increase in cost of sales was primarily due to an increase in net sales, partially offset by the addition of non-cash stock-based compensation expense of$4.9 million . The 7.0% decrease in gross margin was due to, temporary cost-savings initiatives implemented in response to the COVID-19 pandemic and lower rebates and incentive plan accruals in the fiscal quarter endedJune 27, 2020 , which reflected modest sales volumes, as compared to the fiscal quarter endedJuly 3, 2021 , which was impacted by the inclusion of non-cash stock-based compensation, expense, higher growth-related rebates from sales growth and challenges in the supply chain, including constrained raw material supply that has resulted in intermittent manufacturing inefficiencies, and cost inflation. These factors were not fully offset by the timing of price increases and benefits of positive mix shift dynamics. 32
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Selling, General and Administrative Expense
Selling, general and administrative expense was$95.3 million for the fiscal quarter endedJuly 3, 2021 , compared to$15.4 million for the fiscal quarter endedJune 27, 2020 , and increased as a percentage of net sales by 39.1%. The$79.9 million , or 520.4% increase in selling, general and administrative expense was primarily due to$70.4 million increase in stock-based compensation expense,$2.8 million increase in wages from an increase in headcount, particularly for customer-facing activities to support growth of the business, and as a result of the increase in the number of employees following the acquisition of GLI,$1.1 million increase due to legal, accounting and professional fees incurred in connection with our IPO that were not capitalizable and$0.6 million increase in incentive plan accruals reflecting strong sales performance.
Amortization
Amortization was
Interest Expense
Interest expense was$7.5 million for the fiscal quarter endedJuly 3, 2021 , compared to$4.3 million for the fiscal quarter endedJune 27, 2020 . The$3.2 million , or 74.5% increase in interest expense was primarily due to an increase in the outstanding balance of long-term debt and amortization from increased deferred financing fees from entering into an amendment to the Term Loan, compared to the fiscal quarter endedJune 27, 2020 .
Other (Income) Expense, Net
Other (income) expense, net was$(0.8) million for the fiscal quarter endedJuly 3, 2021 , compared to$(1.2) million for the fiscal quarter endedJune 27, 2020 . The$0.4 million decrease in other (income) expense, net was due to a$0.4 million unfavorable change in net foreign currency transaction gains and losses associated with our international subsidiaries, compared to the fiscal quarter endedJune 27, 2020 .
Earnings from
Earnings from equity method investment ofPremier Pools & Spa was$0.8 million for the fiscal quarter endedJuly 3, 2021 , compared to no equity in net earnings ofPremier Pools & Spa for the fiscal quarter endedJune 27, 2020 as the equity method investment was made inOctober 2020 .
Income Tax Expense
Income tax expense was$5.2 million for the fiscal quarter endedJuly 3, 2021 , compared to$5.5 million for the fiscal quarter endedJune 27, 2020 . Our effective tax rate was (10.8)% for the fiscal quarter endedJuly 3, 2021 , compared to 25.0% for the fiscal quarter endedJune 27, 2020 . The difference between theU.S. federal statutory income tax rate and our effective income tax rate for the fiscal quarter endedJuly 3, 2021 was primarily attributable to the impact of stock compensation expense pursuant to the Reorganization. The results for the fiscal quarter endedJuly 3, 2021 include pre-tax stock compensation expense of$73.5 million related to the Reorganization for which there is no associated tax benefit. The difference between theU.S. federal statutory income tax rate and our effective income tax rate for the fiscal quarter endedJune 27, 2020 was primarily impacted by our switching to an income position for the fiscal quarter endedJune 27, 2020 .
Net (Loss) Income
Net (loss) income was$(53.6) million for the fiscal quarter endedJuly 3, 2021 , compared to$16.4 million of net income for the fiscal quarter endedJune 27, 2020 . The$70.0 million , or 426.5% increase in net loss was primarily due to the factors described above. 33 Table of Contents Net (Loss) Income Margin Net loss margin was (29.6)% for the fiscal quarter endedJuly 3, 2021 , compared to net income margin of 14.5% for the fiscal quarter endedJune 27, 2021 . The (44.1)% increase in net (loss) income margin was due to a$70.0 million increase in net loss and an$68.1 million increase in net sales, compared to the fiscal quarter endedJune 27, 2020 due to the factors described above.
Adjusted EBITDA
Adjusted EBITDA was$42.8 million for the fiscal quarter endedJuly 3, 2021 , compared to$33.1 million for the fiscal quarter endedJune 27, 2020 . The$9.7 million , or 29.5%, increase in Adjusted EBITDA was primarily due to a$10.1 million increase in earnings before depreciation and amortization, interest expense, income tax (benefit) expense and stock based compensation expense, as well as a$1.1 million increase in legal, accounting and professional fees incurred in connection with our IPO that are not capitalizable.
Adjusted EBITDA Margin
Adjusted EBITDA margin was 23.7% for the fiscal quarter ended
Two Fiscal Quarters Ended
The following table summarizes our results of operations for the two fiscal
quarters ended
Two Fiscal Quarters Ended % of Net % of Net Change Change % July 3, 2021 Sales June 27, 2020 Sales Amount of Net Sales (dollars in thousands) Net sales$ 329,635 100.0 %$ 163,956 100.0 %$ 165,679 0.0 % Cost of sales 218,840 66.4 % 109,495 66.8 % 109,345 (0.4) % Gross profit 110,795 33.6 % 54,461 33.2 % 56,334 0.4 % Selling, general and administrative expense 122,460 37.2 % 30,792 18.8 % 91,668 18.4 % Amortization 11,074 3.4 % 8,126 5.0 % 2,948 (1.6) % (Loss) income from operations (22,739) 6.9 % 15,543 9.5 % (38,282) (2.6) % Other expense (income): Interest expense 16,572 5.0 % 9,641 5.9 % 6,931 (0.9) % Other (income) expense, net (1,349) 0.4 % 2,499 1.5 % (3,848) (1.1) % Total other expense (income), net 15,223 4.6 % 12,140 7.4 % 3,083 (2.8) % Earnings from equity method investment 998 0.3 % - 0.0 % 998 0.3 % (Loss) income before income taxes (36,964) 11.2
% 3,403 2.1 % (40,367) 9.1 % Income tax expense 8,101 2.5 % 2,440 1.6 % 5,661 0.9 % Net (loss) income$ (45,065) 13.7 % $ 963 0.6 %$ (46,028) 13.1 % Adjusted EBITDA(a)$ 76,368 23.2 %$ 31,210 19.0 %$ 45,158 4.2 %
(a)Adjusted EBITDA is a non-GAAP measure. See "Non-GAAP Measures" for a reconciliation to net income (loss), the most directly comparable GAAP measure, and for information regarding our use of Adjusted EBITDA.
34 Table of ContentsNet Sales Net sales was$329.6 million for the two fiscal quarters endedJuly 3, 2021 , compared to$164.0 million for the two fiscal quarters endedJune 27, 2020 . The$165.6 million , or 101.1%, increase in net sales was due to a$143.7 million increase from volume and a$21.9 million increase from pricing. The$143.7 million volume increase across our product lines primarily attributable to continued strong consumer demand and order volumes across the Company's product portfolio, expanded strategic partnerships with Latham's exclusive dealers, and includes$34.1 million due to having six months of GLI's net sales in our net sales in the two fiscal quarters endedJuly 3, 2021 . The increase in total net sales of$165.6 million across our product lines was$110.0 million for in-ground swimming pools,$33.2 million for liners and$22.4 million for covers.
Cost of Sales and Gross Margin
Cost of sales was$218.8 million for the two fiscal quarters endedJuly 3, 2021 , compared to$109.5 million for the two fiscal quarters endedJune 27, 2020 . Gross margin increased by 0.4% to 33.6% of net sales for the two fiscal quarters endedJuly 3, 2021 compared to 33.2% of net sales for the two fiscal quarters endedJune 27, 2020 . The$109.3 million , or 99.9% increase in cost of sales was primarily the result of the overall increase in sales volume, inflation in the cost of our raw materials and$4.9 million of non-cash stock-based compensation expense. The 0.4% increase in gross margin was primarily due to price increases, higher utilization of fixed cost structure, and a mix shift towards in-ground pools, partially offset by supply chain headwinds and inflation, higher growth-related rebates driven by strong sales growth, and stock-based compensation expense.
Selling, General and Administrative Expense
Selling, general and administrative expense was$122.5 million for the two fiscal quarters endedJuly 3, 2021 , compared to$30.8 million for the two fiscal quarters endedJune 27, 2020 , and increased as a percentage of net sales by 18.4%. The$91.7 million , or 297.7% increase in selling, general and administrative expense was primarily due to$71.6 million increase in stock-based compensation expense,$5.7 million increase in wages from an increase in headcount particularly for customer-facing activities to support growth of the business and as a result of the increase in the number of employees following the acquisition of GLI,$4.0 million increase due to legal, accounting and professional fees incurred in connection with our IPO that were not capitalizable; and$2.8 million increase in incentive plan accruals reflecting strong sales performance.
Amortization
Amortization was$11.1 million for the two fiscal quarters endedJuly 3, 2021 , compared to$8.1 million for the two fiscal quarters endedJune 27, 2020 . The$3.0 million , or 36.3%, increase in amortization was due to the increase in our definite-lived intangible assets resulting from our acquisition of GLI inOctober 2020 .
Interest Expense
Interest expense was$16.6 million for the two fiscal quarters endedJuly 3, 2021 , compared to$9.6 million for the two fiscal quarters endedJune 27, 2020 . The$7.0 million , or 71.9%, increase in interest expense was primarily due to an increase in the outstanding balance of long-term debt and amortization from increased deferred financing fees from entering into an amendment to the Term Loan (as defined below), compared to the two fiscal quarters endedJune 27, 2020 .
Other (Income) Expense, Net
Other (income) expense, net was$(1.3) million for the two fiscal quarters endedJuly 3, 2021 , compared to$2.5 million for the two fiscal quarters endedJune 27, 2020 . The$3.8 million increase in other (income) expense, net was due to a$3.8 million favorable change in net foreign currency transaction gains and losses associated with our international subsidiaries, compared to the two fiscal quarters endedJune 27, 2020 .
Earnings from
Earnings from equity method investment ofPremier Pools & Spa was$1.0 million for the two fiscal quarters endedJuly 3, 2021 , compared to no equity in net earnings ofPremier Pools & Spa for the two fiscal quarters endedJune 27, 2020 as the equity method investment was made inOctober 2020 . 35 Table of Contents Income Tax Expense
Income tax expense was$8.1 million for the two fiscal quarters endedJuly 3, 2021 , compared to$2.4 million for the two fiscal quarters endedJune 27, 2020 . Our effective tax rate was (21.9)% for the two fiscal quarters endedJuly 3, 2021 , compared to 71.7% for the two fiscal quarters endedJune 27, 2020 . The difference between theU.S. federal statutory income tax rate and our effective income tax rate for the fiscal quarter endedJuly 3, 2021 was primarily attributable to the impact of stock compensation expense pursuant to the Reorganization. The results for the fiscal quarter endedJuly 3, 2021 include pre-tax stock compensation expense of$73.5 million related to the Reorganization for which there is no associated tax benefit. The difference between theU.S. federal statutory income tax rate and our effective income tax rate for the fiscal quarter endedApril 3, 2021 was impacted primarily by state income tax expense. The difference between theU.S. federal statutory income tax rate and our effective income tax rate for the fiscal quarter and two fiscal quarters endedJune 27, 2020 was primarily impacted by our switching to an income position for the fiscal quarter endedJune 27, 2020 . The pre-tax income for the two fiscal quarters included losses in tax jurisdictions for which we did not record a tax benefit, which increased the effective income tax rate for the fiscal quarter endedJune 27, 2020 .
Net (Loss) Income
Net loss was$(45.1) million for the two fiscal quarters endedJuly 3, 2021 , compared to$1.0 million of net income for the two fiscal quarters endedJune 27, 2020 . The$46.1 million , or 4,779.6% increase in net loss was primarily due to the factors described above.
Net (Loss) Income Margin
Net loss margin was (13.7)% for the two fiscal quarters ended
Adjusted EBITDA
Adjusted EBITDA was$76.4 million for the two fiscal quarters endedJuly 3, 2021 , compared to$31.2 million for the two fiscal quarters endedJune 27, 2020 . The$45.2 million , or 144.7%, increase in Adjusted EBITDA was primarily due to a$47.1 million increase in earnings before depreciation and amortization, interest expense, income tax (benefit) expense and stock based compensation expense, as well as a$4.0 million increase in legal, accounting and professional fees incurred in connection with our IPO that are not capitalizable, partially offset by a$3.4 million decrease in unrealized (gains) losses on foreign currency transactions, which included changes in the fair value of the contingent consideration recorded in connection with the acquisition ofNarellan Group Pty Limited and its subsidiaries, which was settled inSeptember 2020 .
Adjusted EBITDA Margin
Adjusted EBITDA margin was 23.2% for the two fiscal quarters endedJuly 3, 2021 , compared to 19.0% for the two fiscal quarters endedJune 27, 2020 . The 4.2% increase in Adjusted EBITDA margin was primarily due to a$45.2 million increase in Adjusted EBITDA and an$165.6 million increase in net sales, compared to the fiscal quarter endedJune 27, 2020 . 36
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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 and to compare our performance against that of other companies using similar measures. We have presented Adjusted EBITDA and Adjusted EBITDA margin solely as supplemental disclosures because we believe they allow for a more complete analysis of results of operations and assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, such as (i) depreciation and amortization, (ii) interest expense, (iii) income tax (benefit) expense, (iv) loss 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) other, and (xi) IPO costs. Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and should not be considered as alternatives to net income 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 following this offering, 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 equity compensation, which will remain a key element of
our overall equity-based compensation package; and
? do not reflect the impact of earnings or charges resulting from matters we
consider not to be indicative of our ongoing operations.
Although depreciation and amortization are eliminated in the calculation of Adjusted EBITDA and Adjusted EBITDA margin, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA and Adjusted EBITDA margin do not reflect any costs of such replacements. Management compensates for these limitations by primarily relying on our GAAP results, while using Adjusted EBITDA and Adjusted EBITDA margin as supplements to the corresponding GAAP financial measures. 37
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The following table provides a reconciliation of our net income to Adjusted EBITDA for the periods presented and the calculation of Adjusted EBITDA margin: Fiscal Quarter Ended Two Fiscal Quarters Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 (dollars in thousands) Net (loss) income$ (53,598) $ 16,414 $ (45,065) $ 963
Depreciation and amortization 7,770
5,854 15,670 11,609 Interest expense 7,516 4,308 16,572 9,641 Income tax expense 5,218 5,459 8,101 2,440 Loss on sale and disposal of property and equipment 22 (3) 187 - Restructuring charges(a) 36 347 407 633 Stock-based compensation(b) 75,511 240 76,975 464 Unrealized gains (losses) on foreign currency transactions(c) (731) (1,176) (792) 2,565 Strategic initiative costs(d) 376 1,457 376 2,549 Acquisition and integration related costs(e) 4
126 72 238 Other(f) (355) 69 (91) 108 IPO Costs(g) 1,079 - 3,956 -
Adjusted EBITDA$ 42,848 $ 33,095 $ 76,368 $ 31,210 Net sales$ 180,889 $ 112,822 $ 329,635 $ 163,956 Net (loss) income margin (29.6) % 14.5 % (13.7) % 0.6 % Adjusted EBITDA margin 23.7 % 29.3 % 23.2 % 19.0 %
(a) Represents severance and other costs for our executive management changes.
(b) Represents non-cash stock-based compensation expense. Of the expense recorded during the fiscal quarter endedJuly 3, 2021 ,$0.5 million was due to the accelerated vesting of restricted stock and$49.0 million was due to the modification as a result of the Reorganization. (c) Represents foreign currency transaction (gains) and losses associated with our international subsidiaries and changes in the fair value of the contingent consideration recorded in connection with the acquisition ofNarellan Group Pty Limited and its subsidiaries, which was settled inSeptember 2020 .
(d) Represents fees paid to external consultants for our strategic initiatives, including our rebranding initiative.
(e) Represents acquisition and integration costs primarily related to the acquisition of GLI, the equity investment in Premier Pools & Spas, as well as other costs related to a transaction that was abandoned.
(f) Other costs consist of other discrete items as determined by management, including (i) fees paid to external consultants for tax restructuring, (ii) the cost for legal defense of a specified matter, (iii) the cost incurred and insurance proceeds related to our production facility fire in Picton,Australia in 2020, (iv) temporary cleaning, equipment and salary costs incurred in response to the COVID-19 pandemic, offset by government grants received inthe United States ,Canada andNew Zealand and (v) non-cash adjustments to record the step-up in the fair value of inventory related to the acquisition of GLI, which are amortized through cost of sales in the condensed consolidated statements of operations. (g) Represents items management believes are not indicative of ongoing operating performance. These expenses are primarily composed of legal, accounting and professional fees incurred in connection with the IPO that are not capitalizable, which are included within selling, general and administrative expense. 38 Table of Contents
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are net cash provided by operating activities and availability under our Revolving Credit Facility. Historically, we have funded working capital requirements, capital expenditures, payments related to acquisitions, and debt service requirements with internally generated cash on hand and through our Amended Term Loan and Revolving Credit Facility (each as defined below under "-Our Indebtedness") and through the issuance of shares of our common stock. Our primary cash needs are to fund working capital, capital expenditures, debt service requirements and any acquisitions we may undertake. As ofJuly 3, 2021 , we had$76.5 million of cash,$237.3 million of outstanding borrowings and an additional$30.0 million of availability under our Revolving Credit Facility, which was undrawn. InApril 2021 , we completed our IPO, pursuant to which we issued and sold 23,000,000 shares of common stock, inclusive of 3,000,000 shares sold by us pursuant to the full exercise of the underwriters' option to purchase additional shares. We received net proceeds of$399.3 million . 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 year, driven primarily by seasonality and the timing of raw material purchases. Our capital expenditures are primarily related to growth, including production capacity, storage and delivery equipment. We are in the midst of a multi-year capital plan to invest in our facilities, technology and systems, including investments to expand our fiberglass manufacturing capacity. We expect to fund these capital expenditures from net cash provided by operating activities. 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. 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.
Our Indebtedness
Revolving Credit Facility
OnDecember 18, 2018 ,Latham Pool Products entered into an agreement (the "Credit Agreement") withNomura Corporate Funding Americas, LLC ("Nomura") that included a revolving line of credit (the "Revolver") and letters of credit ("Letters of Credit" or collectively with the Revolver, the "Revolving Credit Facility"), as well as a Term Loan (as described and defined below). The Revolving Credit Facility is utilized to finance ongoing general corporate and working capital needs with the Revolver of up to$30.0 million . The Revolving Credit Facility matures onDecember 18, 2023 . The Revolving Credit Facility allows for either Eurocurrency borrowings, which bear interest ranging from 4.50% to 4.75%, orU.S. dollar base rate borrowings, which bear interest ranging from 3.50% to 3.75% depending on the FirstLien Net Leverage Ratio, as defined in the Credit Agreement. 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 is equal to the applicable margin times the actual daily amount by which the$30.0 million initial commitment exceeds the sum of the outstanding borrowings under our Revolving Credit Facility. The applicable margin ranges from 0.375% to 0.500% as determined by our First Lien Net Leverage Ratio as defined in the Credit Agreement. We are required to meet certain financial covenants, including maintaining specific liquidity measurements. There are also negative covenants, including certain restrictions on our ability to incur additional indebtedness, create liens, make investments, consolidate or merge with other entities, enter into transactions with affiliates and make prepayments. As ofJuly 3, 2021 we had no outstanding borrowings under the Revolving Credit Facility. 39 Table of Contents Term Loan Facility
Pursuant to the Credit Agreement,Latham Pool Products also borrowed$215.0 million in term loans (the "Term Loan"). The Term Loan was amended inMay 2019 andOctober 2020 to provide additional borrowings (the "Amended Term Loan"). The Term Loan was further amended onJanuary 25, 2021 , to provide an additional incremental term loan of$175.0 million (the "Third Amendment"). We accounted for$165.0 million of the borrowings under the Third Amendment as new debt and$10.0 million of the borrowings under the Third Amendment as a debt modification. We recorded an aggregate of$1.2 million of debt issuance costs as a direct reduction to the carrying amount of long-term debt on the condensed consolidated balance sheets. OnJanuary 25, 2021 ,Latham Pool Products borrowed the incremental term loan, and the proceeds were used onFebruary 2, 2021 to repurchase and retire treasury stock in the amount of$64.9 million and to make a$110.0 million dividend to Class A unitholders. The Term Loan, together with the Third Amendment, are referred to as the "Amended Term Loan." The Amended Term Loan bears interest at (1) a base rate equal to the highest of (i) the Federal Funds Rate, as defined in the Credit Agreement, plus 1/2 of 1.00%, (ii) the "prime rate" published in the Money Rates section of theWall Street Journal and (iii) LIBOR plus 1.00% (2) plus a Loan Margin, as defined in the Credit Agreement, of (i) 6.00% for Eurocurrency Rate Loans and (ii) 5.00% for Base Rate Loans, as defined in the Credit Agreement. The Amended Term Loan has a maturity date ofJune 18, 2025 . Interest and principal payments are due quarterly. In accordance with the terms of the Amended Term Loan, we elected to change the terms of the prepayment schedule from an inverse application to a pro rata application and as a result we are required to repay the outstanding principal balance of the Amended Term Loan in fixed quarterly payments of$3.6 million , commencingJune 30, 2021 . In connection with the Amended Term Loan, we are subject to various financial reporting, financial and other covenants, including maintaining specific liquidity measurements. The obligations under the Credit Agreement are guaranteed by certain of our wholly owned subsidiaries as defined in the security agreement. The obligations under the Credit Agreement are secured by substantially all of the guarantors' tangible and intangible assets, including, but not limited to, their accounts receivables, equipment, intellectual property, inventory, cash and cash equivalents, deposit accounts and security accounts. The Credit Agreement also restricts payments and other distributions unless certain conditions are met, which could restrict our ability to pay dividends.
As of
As ofJuly 3, 2021 we had$237.3 million of outstanding borrowings under the Amended Term Loan. OnApril 27, 2021 , we used a portion of the net proceeds of our IPO to repay$152.7 million of the Amended Term Loan.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented: Two Fiscal Quarters Ended July 3, 2021 June 27, 2020 (in thousands) Net cash provided by operating activities$ 14,167 $ 10,239 Net cash used in investing activities (12,843) (6,205) Net cash provided by (used in) financing activities 17,852 (5,001) Effect of exchange rate changes on cash (1,969) 1,857 Net increase in cash$ 17,207 $ 890 40 Table of Contents Operating Activities During the two fiscal quarters endedJuly 3, 2021 , operating activities provided$14.2 million of cash. Net income, after adjustments for non-cash items, provided cash of$54.3 million . Cash provided by operating activities was further driven by changes in our operating assets and liabilities of$(40.2) million . Net cash used in changes in our operating assets and liabilities for the two fiscal quarters endedJuly 3, 2021 consisted primarily of a$44.5 million increase in trade receivables, a$9.5 million increase in inventories, a$3.7 increase in prepaid expenses and other current assets, and a$0.1 increase in income tax receivable, partially offset by an$11.0 million increase in accounts payable, a$5.6 increase in accrued expenses and other current liabilities, a$0.8 million decrease in other assets and a$0.1 million increase in other long-term liabilities. The change in trade receivables was primarily due to the timing of and increase in net sales, and the increase in inventories was primarily due to increased production and inventory build in response to existing and anticipated customer demand. The changes in accrued expenses and other current liabilities and accounts payable were primarily due to timing of payments. During the two fiscal quarters endedJune 27, 2020 , operating activities provided$10.2 million of cash. Net income, after adjustments for non-cash items, provided cash of$15.2 million . Cash used in operating activities was further driven by changes in our operating assets and liabilities of$(4.9) million . Net cash used in changes in our operating assets and liabilities for the two fiscal quarters endedJune 27, 2020 consisted primarily of a$25.7 million increase in trade receivables, a$0.8 million increase in inventories, partially offset by a$10.7 million increase in accounts payable,$9.5 increase in accrued expenses and other current liabilities, and a$0.9 decrease in prepaid expenses and other current assets. The change in trade receivables was primarily due to the timing of net sales, and the increase in inventories was primarily due to increased production in response to customer demand. The changes in accrued expenses and other current liabilities and accounts payable were primarily due to timing of payments.
Investing Activities
During the two fiscal quarters endedJuly 3, 2021 , investing activities used$12.8 million of cash, primarily consisting of purchases of property and equipment for$13.0 million . The purchase of property and equipment was to expand capacity for inventory production in order to meet increasing customer demand.
During the fiscal quarter ended
Financing Activities
During the two fiscal quarters endedJuly 3, 2021 , financing activities provided$17.9 million of cash, primarily consisting of proceeds from our IPO, net of underwriting discounts, commissions and offering costs of$399.3 million , proceeds from borrowings on the Amended Term Loan of$172.8 million and borrowings on the Revolving Credit Facility of$16.0 million , partially offset by the repurchase of treasury stock of$281.6 million , payments on long-term debt borrowings of$161.3 million , dividends to Class A unitholders of$110.0 million , and payments on Revolving Credit Facility borrowings of$16.0 million . During the two fiscal quarters endedJune 27, 2020 , financing activities used$5.0 million of cash, consisting of payments on long-term debt borrowings of$4.4 million and repurchase and retirement of treasury stock of$0.6 million . 41 Table of Contents Contractual Obligations Long-term indebtedness and interest on long-term indebtedness changed materially due to the Third Amendment datedJanuary 25, 2021 , which increased the outstanding principal balance of the Term Loan by$175.0 million . A portion of these proceeds were used to repurchase and retire treasury stock in the amount of$64.9 million onFebruary 2, 2021 . The Third Amendment did not change the Term Loan's maturity date ofJune 18, 2025 , at which time the remaining principal is due. The Third Amendment increased the fixed quarterly principal payments from$3.3 million under the Second Amendment to$5.8 million . Upon completion of the IPO we used$152.7 million of the net proceeds from the IPO to repay$152.7 million of the Amended Term Loan. During the fiscal quarter endedJuly 3, 2021 , in accordance with the terms of the Amended Term Loan, we elected to change the terms of the prepayment schedule from an inverse application to a pro rata application and as a result we are required to repay the outstanding principal balance of the Amended Term Loan in fixed quarterly payments of$3.6 million , commencingJune 30, 2021 . Due to the revised principal payments under the Amended Term Loan, the required principal payments are$7.1 million in the next year,$28.5 million in the next one to three years, and$206.3 million in the next four to five years. At the new assumed interest rate of 7.73% as ofJanuary 25, 2021 , the interest payments are$10.5 million in the next year,$38.9 million in the next one to three years, and$25.9 million in the next four to five years. There have been no other material changes, outside of the ordinary course of business, to these contractual obligations during the quarter endedJuly 3, 2021 from those described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations" in our Prospectus with the exception of long-term indebtedness. See "-Our Indebtedness."
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe United States . Throughout the preparation of these financial statements, we have made estimates and assumptions that impact the reported amounts of assets, liabilities and the disclosure of contingent liabilities at the date of the financial statements and revenues and expenses during the reporting period. Our critical accounting policies are described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our Prospectus. 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. For additional information about our critical accounting policies and estimates, see the disclosure included in our Prospectus as well as Note 2 - Summary of Significant Accounting Policies in the notes to the condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSEC .
Recently Issued and Adopted Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. 42
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