Latham Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Fiscal quarter ended April 2, 2022; comparative quarter ended April 3, 2021. Unaudited consolidated results. Latham designs, manufactures and markets residential swimming pools, liners and covers and reports as one operating segment.
Financial performance and position
| Metric | Q1 2022 | Prior-year quarter |
|---|---|---|
| Net sales | $191.6 million | $148.7 million |
| Gross profit / margin | $70.7 million / 36.9% | $52.4 million / 35.3% |
| Operating income | $6.8 million | $19.7 million |
| Net income (loss) / margin | $(2.8) million / (1.5)% | $8.5 million / 5.7% |
| Adjusted EBITDA / margin | $48.0 million / 25.0% | $33.5 million / 22.5% |
| Operating cash flow | $(57.5) million | $(41.0) million |
| Capital expenditures | $6.7 million | $4.6 million |
Sales increased 28.8%, with $35.6 million attributed to pricing and $7.3 million to volume. Growth by product was $18.2 million for in-ground pools, $16.2 million for liners and $8.5 million for covers. Gross margin improved 1.6 percentage points, while operating income declined as higher selling, general and administrative costs and offering-related fees more than offset sales growth.
At April 2, 2022, cash was $18.7 million and total debt carrying value was $324.1 million, including $320.9 million long-term debt and $3.3 million current maturities. The company had a $75 million revolving facility, with $10 million drawn and $65 million available. Current assets were $313.4 million and current liabilities were $124.0 million. The company reported compliance with its credit covenants and said available cash, operating cash generation and revolver capacity should cover operating and capital needs over the next 12 months, subject to assumptions.
Operating cash use reflected working-capital investment, notably a $78.9 million increase in receivables and a $30.5 million increase in inventory, partly offset by higher accounts payable. Management said inventory was built to mitigate potential supply interruptions and support demand. Cash declined $25.3 million during the quarter to $18.7 million.
Material changes and unusual items
- Net income shifted to a $2.8 million loss from $8.5 million income. The quarter included $11.4 million of underwriting fees for the January stock offering and a $3.5 million loss on extinguishment of debt related to refinancing.
- SG&A rose $18.1 million, including a $14.3 million increase in stock-based compensation; total stock-based compensation was $16.9 million versus $1.5 million a year earlier. Amortization also increased by $1.6 million, primarily following the Radiant Pools acquisition.
- The effective tax rate was 215.1%, primarily because stock compensation expense had no associated tax benefit; income tax expense was $5.3 million on $2.5 million of pretax income.
- February refinancing replaced the prior credit agreement with a $325 million term loan and $75 million revolving facility. The term loan matures in 2029 and the revolver in 2027; the term loan’s stated effective interest rate was 4.96% at quarter-end.
- The January common-stock offering raised $257.7 million net, but proceeds were used to buy shares from existing stockholders; the company also recorded an equal $257.7 million stock repurchase. The filing describes this as a sale of shares by stockholders, not a primary capital raise retained by the company.
- Adoption of lease accounting in January added operating lease right-of-use assets and liabilities; quarter-end lease liabilities were $33.8 million. Comparative lease information was not recast.
Outlook, commentary and risks
The filing provides no specific revenue, earnings or margin guidance. Management described a multi-year investment program in facilities, technology and systems, including expanded fiberglass-pool capacity, and expects to fund capital expenditures from operating cash flow. The company’s business is seasonal, with sales and income historically highest in spring and summer; weather can affect demand and results.
Key disclosed risks include resin and other raw-material shortages, supplier and transportation constraints, inflation in materials and wages, and the possibility that price increases could weaken demand. The filing specifically notes ongoing resin shortages that constrained fiberglass production and could again affect sales and profitability. It also cites economic uncertainty, interest rates and consumer financing access, weather, international and foreign-exchange exposure, and the Russia-Ukraine conflict and related sanctions.
A fire at the company’s Texas facility in April 2022 resulted in a total loss of the manufacturing facility, according to the risk-factor disclosure. The filing does not provide a clear quantified estimate of the financial impact or insurance recovery. On May 10, 2022, the company authorized a stock repurchase program of up to $100 million over three years; repurchases are discretionary and subject to market conditions, alternative capital uses and debt terms. Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no legal proceeding expected to have a material adverse effect.
Important facts for investors to verify
- How the Texas facility fire affects production capacity, customer deliveries, capital spending, insurance proceeds and the company’s full-year results.
- Whether pricing can continue to offset material, labor and freight inflation without reducing demand, and whether resin supply constraints are easing.
- Working-capital conversion: receivables and inventories rose substantially, while operating cash use worsened year over year.
- The sustainability of adjusted EBITDA growth relative to GAAP results, including the substantial stock compensation and other excluded costs; Adjusted EBITDA is a non-GAAP measure.
- Debt costs, variable-rate exposure, covenant headroom and the effect of any repurchases on liquidity and leverage; the announced buyback is not a commitment to repurchase shares.
- The filing’s stated 12-month liquidity assessment depends on assumptions; actual seasonal cash needs and operating performance may differ.